The government is mulling scrapping windfall tax on crude oil, said Tarun Kapoor, advisor to the Prime Minister on Wednesday. He said that the petroleum ministry has sought removal of the tax and that the finance ministry will take a call on the same noting that there is no relevance of the tax anymore.
“Th finance ministry will take a view. I think the petroleum ministry has already written to them,” Kapoor said on the sidelines of an event.
He said that there is no relevance of the tax now as the global crude oil prices have declined substantially compared to 2022 when the tax was implemented.
The removal of the tax, if implemented, would benefit upstream companies such as state-owned ONGC and private players like Reliance as a high windfall tax affects their profitability and cash accruals. The two companies in partnership have recently bid for an oilfield exploration license.
The government had first imposed windfall tax in July 2022 to tax the profits of crude oil producers when the global crude oil prices increased sharply nearing $100 per barrel on the back of Russia-Ukraine conflict. At present, Brent crude oil prices are hovering around $75 per barrel amid rise in US crude oil inventories and mounting tensions in the Middle East.
The government levies windfall tax when an industry earns large profits unexpectedly. The move was aimed at curbing unprecedented profits earned by oil companies and generating additional revenue for the government.
Windfall tax is reviewed every fortnight on the basis of oil prices and fuel margins in the international market. An increase in windfall tax comes against the prospects of upstream oil companies such as Oil and Natural Gas Corp and Oil India.
Earlier, the government had slashed windfall tax on domestically produced crude oil by 11.9% to Rs 1,850 per tonne from previous Rs 2,100 per tonne, effective from August 31. It was later scrapped to Rs 0 per tonne, effective September 18. Windfall tax on export of diesel and aviation turbine fuel (ATF) was retained at nil.
Due to a slight lag in windfall tax adjustments compared to changes in prices of Brent crude, the country’s upstream companies are expected to witness only a marginal growth in their net crude realisations in Q2FY25 compared to the previous quarter, as per analysts.
“Due to a slight lag in windfall tax adjustments in Q2FY25, relative to changes in Brent crude prices, net crude realisations are set to show nearly $2 per barrel improvement QoQ,” ICICI Securities had said. Analysts see limited change in effective gas realisations, with a cap of $6.5 per MMBtu. Oil India and Oil and Natural Gas Corp are expected to deliver a similar trend in oil & gas production, with both companies likely showing 1% each on-quarter improvement in their oil and gas output.
“Overall, EBITDA for both upstream companies may improve 1% QoQ and 1% YoY, while PAT (profit after tax) will likely improve by 4% on a QoQ basis with a decline of 12% YoY,” as per ICICI Securities.
