Govt cuts windfall taxes on oil companies. All you want to know

In a major relief for oil producing and marketing companies, the government has eased some of the windfall taxes it had recently imposed on them following the rise in the international price of crude oil in the wake of the Russian invasion of Ukraine.

In its fresh move, the government has extinguished the levy on gasoline exports and reduced windfall taxes on other fuels. This about-turn of sorts comes less than three weeks after it imposed these taxes, saying oil companies were making windfall gains as crude prices had remained at sustained high levels.

Which companies are the most likely to benefit from this move?

Reliance Industries Ltd, which is India’s top fuel exporter, and the government-owned ONGC Ltd, which is the country’s biggest crude oil producer, are likely to benefit the most from such a move.  Reliance and Rosneft-backed Nayara Energy Ltd, India’s only privately owned refiners, make up 80% to 85% of India’s overall gasoline and diesel exports, according to industry consultant FGE.

Others that will also benefit include state-owned Oil India Ltd and Vedanta owned Cairn Energy. Oil marketing companies like Indian Oil, Bharat Petroleum and Hindustan Petroleum are also likely to see their counters move up following this reversal.

What is the tax reduction?

The government reduced the windfall tax on diesel and aviation fuel shipments by Rs 2 per litre and scrapped completely a Rs 6 per litre levy on gasoline exports, according to a notification.

It also cut the tax on domestically produced crude by about 27% to Rs 17,000 a tonne.

Why did the government decide to cut these taxes?

It did so ostensibly because the taxes had begun taking a toll on the profits of these companies.

Moreover, recent reports said that a massive crash in refining margins of diesel, petrol and jet fuel has diminished the super-profits of refiners. "We see a good chance for windfall tax relief in one of the subsequent reviews this quarter,” brokerage CLSA had said.

When were the taxes imposed?

The government imposed the taxes on July 1, joining a growing number of nations placing windfall levies to tap energy companies’ booming profits. But international fuel prices have cooled since then, eroding profit margins at both oil producers and refiners.

How has the international price of crude been moving?

International crude prices have slumped since mid-June on concerns about a potential global recession, at one point erasing all the gains that followed Russia’s invasion of Ukraine. Returns from processing gasoline and diesel in Asia have plunged in recent weeks, with industry consultant FGE expecting a further decline in margins this quarter due to increased supplies.