Government eases windfall tax Diesel, Crude Oil And Jet Fuel Shipments: The government on Wednesday lowered the 19-day-old windfall taxes on domestic crude and exports of diesel and aviation turbine fuel and removed the tax on overseas shipment of petrol, as global crude prices moved to a lower “band” and refining spreads of domestic fuel companies have declined. It also cut the new cess on domestically produced crude by 27%.
The taxes were imposed on July 1 to rein in inflation and ensure adequate availability of the transport fuels in the local market.
While inflation is still beyond the Reserve Bank of India’s comfort zone, the availability of retail fuels has increased since the taxes were imposed, though state-run oil marketing companies are still catering to 95% of the 60 million daily visitors to retail fuel outlets from 90% in normal times.
The Centre scrapped a Rs 6 a litre export duty on petrol and reduced the taxes on the export of diesel and jet fuel by Rs 2/litre each to Rs 11 and Rs 4 respectively. It slashed the cess on domestically produced crude oil to
17,000/ tonne from23,250, a move that will benefit state-tun ONGC, Oil India and Vedanta’s Cairn & Gas.
It also exempted exports from SEZ units from the export taxes, a move that will benefit Reliance Industries, as half of its petroleum products exports are from its Jamnagar SEZ.
However, a government official told FE that the taxes will move either way — go up when crude prices rise and decline when prices moderate — and a total withdrawal is possible only when crude prices fall to around $75/barrel.
Nomura estimates that tax cuts will reduce the revenue from fuel exports from Rs 66,400 crore (0.24% of GDP) on an annualised basis to Rs 21,100 crore (0.08% of GDP). It added that the reduced cess on domestic crude oil production could slash the annualised tax revenue by Rs 18,500 crore (0.07% of GDP) to Rs 50,500 crore (0.18% of GDP).
Morgan Stanley said the unwinding of the windfall tax came a little quicker than estimated; Jeffries too was “surprised” with the overnight move.
On July 1, when the new taxes kicked in, Brent crude prices were ruling at $111.63/ barrel and prices have since moderated to $105.75 on Wednesday.
“The windfall tax was imposed as a specific amount, not as a percentage. The taxes were fixed keeping in mind a band for crude prices. Since prices have moved out of the band, a change in taxes were necessary,” an official said.
The new taxes are being reviewed every 15 days factoring in the rupee-US dollar exchange rate, global crude prices and the domestic cost of crude.
“When crude prices come down to a level which is not very unusual, the taxes may be withdrawn. If global crude is $75/barrel, firms may not have windfall gains,” another official said.
On May 21, the government cut excise duty on petrol by Rs 8/litre to Rs 19.1/litre and that on diesel by Rs 6/litre to Rs 15.8/litre to give relief to consumers, a move that would cost the exchequer about Rs 85,000 crore in FY23.
Vandana Hari, founder & CEO of Vanda Insights, a provider of global oil markets macro-analysis, said, “Exactly what calculations guided the government’s decision to eliminate the export tax on petrol while trimming the taxes on diesel and jet fuel is hard to say, but the elimination or reduction of the windfall taxes on product exports makes sense, given the sharp drop in refining margins this month.”
She said the supply situations with regard to petrol and diesel in the domestic market may also have been a factor, as one of the aims of the new taxes was to encourage the private refiners to supply enough fuel at home. While all major products have seen an erosion in refining margins, diesel and jet fuel are still enjoying better profits relative to petrol. That could have been an input into the decision.
Hetal Gandhi, director, Crisil, said the government’s move to eliminate taxes on petrol exports may have come from its stagnant sales, both within and to the export markets. While reduction in taxes on diesel seems to be stemmed from its higher demand from the domestic as well as export markets. “Moreover, export spread for petrol has come down more sharply than diesel in recent times,” she said.
The government had on July 1 levied a Rs 23,250 per tonne cess on domestically produced crude. It also imposed Rs 6 a litre ($12/bbl) on exports of petrol and aviation fuel and Rs 13 a litre ($26/bbl) for diesel to arrest the tendencies of the private retailers to dock products overseas depriving the domestic market.
The benchmark Brent crude was traded at $107 a barrel on Wednesday, just $5/barrel lower than the July 1 level leading to a fall in domestic refining margins. On July 13, CLSA estimated the $12/bbl windfall tax on petrol took the realised refining spread down to a near loss-making level of just $2/bbl. Similarly, the diesel spread after the export tax of $26/bbl would be a meagre $2/bbl, it had said.