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Oil windfall tax to yield Rs 40,000 crore net revenue

The profit generated after accounting for cost from producing crude and natural gas from fields, awarded by the government under a production sharing contract, is called profit petroleum.

Petrol Diesel tax revenue
The new taxes are aimed at cornering a pie of the “windfall profits” reaped by some of the domestic firms on the back of elevated global oil prices.

The new imposts on domestic crude and export of petrol, diesel and aviation turbine fuel is expected to garner around Rs 40,000 crore net additional revenue in FY23, offsetting nearly half the revenue foregone due to the recent excise duty cut on petrol and diesel, a senior government official told FE.

On July 1, the Centre imposed a new special additional excise duty of Rs 23,250/tonne on crude while new export taxes (special additional excise) on petrol, diesel and ATF are Rs 6/litre, Rs 13/litre and Rs 6/litre, respectively. The new taxes are aimed at cornering a pie of the “windfall profits” reaped by some of the domestic firms on the back of elevated global oil prices.

While there are various estimates by analysts, such as by Nomura India, which has said “we may see a positive impact on the Centre’s fiscal finances by Rs 1.1 trillion”, finance ministry officials were sceptical about such high estimates of additional revenues due to the new taxes.

“The net extra revenue to the government could be around Rs 40,000 crore or a little more,” the official said.

When indirect tax is levied, it reduces the profit and that part of the profit which would have come as income tax. In the petroleum sector, there is also a concept called profit sharing with the government. When the profit goes down, the government’s share of profit, in the order of 20-25%, also comes down, the official said.

The profit generated after accounting for cost from producing crude and natural gas from fields, awarded by the government under a production sharing contract, is called profit petroleum.

In view of these variables, only a part of the amount collected due to the new taxes is incremental revenue, the official added. In other words, even prior to these measures, oil explorers were sharing cess, royalty, taxes and dividends on incremental higher earnings on crude to some extent.

Similarly, on the refining side, the tax applies to only exports with an aim to curb exports. “While it will yield additional revenues, it is very difficult to make any calculation based on last year figures of exports,” the official added. The Centre has curbed exports from non-SEZ refineries. Companies exporting petrol are required to sell in the domestic market the equivalents of 50% and 30% of the petrol and diesel sold overseas in FY23.

Overall, India exported 42% of its diesel and 44% of its petrol production in FY22 and 40% of its diesel and 44% of its petrol production year to date, Morgan Stanley said in a note.

These imposts, along with additional revenue expected due to buoyancy in tax revenues will largely keep government balance sheet unchanged from what is projected in FY23 Budget.

On May 21, the government had 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.

Besides tax relief, the Centre is also estimated to spend an extra Rs 2 trillion in aggregate over the Budget Estimate on fertiliser, food and fuel subsidies in FY23. While about Rs 1.5 trillion (about Rs 1.3 trillion additional net tax revenues due to buoyancy and Rs 20,000 crore extra expected in disinvestment receipts) extra revenues would offset the large chunk of extra spending, bulk of the remaining Rs 50,000 crore could now be covered by the new imposts on crude and petroleum product exports.

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