Moody’s Investors Service on Tuesday said the windfall taxes on domestic crude oil production and fuel exports will generate close to $12 billion (Rs 94,800 crore) for the government in the remainder of the current fiscal year while slashing profits of companies such as Reliance Industries (RIL) and Oil and Natural Gas Corporation Ltd (ONGC), the PTI reported.
The government will review the just introduced windfall tax on domestically produced crude oil and fuel exports every two weeks based on foreign currency rates and international oil prices, but no levels have been fixed for its recall, top officials said on Monday.
Revenue Secretary Tarun Bajaj said the USD 40 per barrel level of oil prices being talked about for a rollback of the levy is unrealistic, considering the international oil rates currently.
The review is based on the premise that if crude prices fall, then windfall gains will cease and new taxes would be rollback.
“There is a way we will monitor it every 2 weeks, depending on the foreign currency rates and depending on where the international prices are,” Bajaj said.
“What is the dollar to rupee, the international price of diesel, crude, what is the domestic cost of crude, will keep reviewing it. You can decipher it yourself once we review it.”
Following the government’s announcement, Indian oil companies will have to pay Rs 6 per liter (around USD 12.2 per barrel) on exports of petrol and ATF, and Rs 13 per liter (around USD 26.3 per barrel) on exports of diesel. At the same time, upstream producers will have to pay taxes of Rs 23,250 per tonne (around USD 38.2 per barrel) of crude oil produced in India.
What is windfall tax?
A government imposes a windfall tax on a company when the latter makes sudden unexpected profits. The Indian government has imposed a windfall tax on domestic crude oil companies due to the large profits they made amid rising crude oil prices in the international market. The domestic companies have been selling crude to domestic refineries at international parity prices, which results in windfall gains.
On July 1, the government imposed windfall gain taxes on the export of petrol, diesel, and aviation turbine fuel (ATF), and the domestic production of crude oil. It has also mandated exporters to meet the requirements of the domestic market first.
“The tax increase will reduce the profits of Indian crude producers and oil exporters like Reliance Industries Limited (RIL) and Oil and Natural Gas Corporation Ltd (ONGC),” Moody’s said in its comments on the new taxes.
“India’s higher export duties for fuel products will curtail export receipts, but the concurrent announcement of higher customs duties on gold imports will serve to limit a further widening of the current account deficit. The country’s large foreign exchange reserves remain sufficient to preempt any issues concerning the repayment of external debt despite the weakening of the rupee,” it said.
The rating agency said the rise in tax payments is not expected to materially weaken the RIL or ONGC’s credit quality because their margins will continue to be healthy.
“High crude oil prices will support the earnings of oil producers. And while profits generated from oil exports will fall because of windfall taxes, they will likely remain higher than the levels over April 2020 to March 2022 if refining margins are sustained at the highs seen in April to June this year,” it said.