Windfall taxes must go: Govt should make fuel business attractive instead of unnecessarily interfering in it

Persistently high inflation is what the government is most worried about, as it threatens to impair macroeconomic fundamentals and stifle a recovery.

Windfall taxes must go: Govt should make fuel business attractive instead of unnecessarily interfering in it
Though the country has managed to do away with formal price controls on auto fuels and the Union budget is largely relieved of the onus of explicit fuel subsidies, the markets are hardly free.

By imposing windfall taxes on domestic oil companies—upstream producers and refiners focused on export markets—on July 1, the government had sought to lay its hands on a chunk of the “windfall profits” made by them in these “extraordinary times.” It had apparently identified a threshold of global crude price where pursuit of “super-normal profits” by these firms could stoke fuel inflation and lead to higher inflationary expectations. It felt that aggressive export sales by private refiners had created supply constraints in the domestic auto fuel markets. The government has, however, cut the taxes by almost half at the first instance of the fortnightly review, as crude and product spreads of the companies concerned have considerably narrowed in the last two weeks. With the Brent crude price cooling off by nearly a fifth in the two weeks to mid-July, spreads on petrol by Reliance Industries have, for instance, shrunk by 60% and that on diesel by nearly half. It doesn’t require even a fortnight for the dynamics of globalised market to change and fly in the face of artificial market intervention.

Persistently high inflation is what the government is most worried about, as it threatens to impair macroeconomic fundamentals and stifle a recovery. But surprise decisions like export taxes distort markets and are at odds with the promises of stable tax regime and regulatory restraint. Export taxes, by definition, are anti-market. Multilateral trade rules recognise minimal import tariffs as a tool for countries to give a modicum of protection to domestic industries, but export levies are a rarity and generally denounced. The vicissitudes of the global energy markets caused by the Russia-Ukraine conflict and the high commodity prices are behind the “windfall taxes” on oil companies. The external situation has made it incumbent on the government to tackle a spike in imported inflation. Given that half the country’s imports are price inelastic, there are not many options if global prices of hydrocarbons and base metals spiral. The burden of increased global prices gets transmitted to the Indian economy and it is a policy call if it reaches the end consumers by how much and how soon.

Though the country has managed to do away with formal price controls on auto fuels and the Union budget is largely relieved of the onus of explicit fuel subsidies, the markets are hardly free. Therein lies the reason for the current imbroglio, where a government, which vows to encourage domestic manufacturing, is drawn to keep a close eye on export business of private companies and worry about domestic availability of fuels despite the country’s robust refining capacity.

These taxes don’t even boost the government’s revenue much to allow wholesome redeployment of public resources, as any rise in tax receipts will be largely offset by reduced dividend receipts and PSU capex constraints the taxes themselves could cause. The prolonged stagnation in production of oil and natural gas has a lot to do with the absence of a regime conducive for risk-taking and investments. After the latest cut, the taxes on crude production are down by a fourth from the July 1 level, but the tax content in crude price is still as high as 50%. If a strong value chain is to evolve in the sector, global parity pricing of crude must be non-negotiable. Also, taxes on exploration and production activities should be slashed.

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