Decoded: What is windfall tax on oil companies and where does India stand?

Against the backdrop of crude oil prices touching new highs due to Russia’s invasion of Ukraine, there has been a buzz in markets about a one-time “windfall tax” on oil and gas companies. The argument is that since energy companies have profited from high oil prices, a temporary tax can be levied upon them to shore up the government’s finances. Many European nations have already imposed a windfall tax or are considering doing so.

What is windfall tax?

It is essentially a one-time tax imposed on companies or sectors that have seen a jump in their profitability for any number of reasons. The war in Europe has led to a spike in crude and commodity prices. Oil and gas companies around the world are making money, whether upstream, midstream or downstream. And these gains are not because of any improvement in their processes but because of the geopolitical situation.

Crude prices extended their gains on Tuesday after the European Union agreed to a partial ban on Russian oil. Brent crude rose 2 per cent to $124 a barrel, while West Texas Intermediate crude was trading at $119.34 a barrel, up 3.7 per cent from Friday’s close.

With governments taking fiscal measures to battle inflation, the talk of taxing companies benefiting from the crude price rise has gained steam. While such proposals have been discussed and imposed earlier in many countries, last week the United Kingdom announced a 25 per cent levy on energy companies to ease the financial burden on millions of households amid raging inflation.

As a temporary policy, the tax would be phased out “when oil and gas prices return to historically more normal levels”, with a sunset clause written into the legislation, Chancellor of the Exchequer Rishi Sunak said. Other countries such as Italy and Hungary have also imposed this tax.

Will such a tax be imposed in India?

A top government official told Business Standard on condition of anonymity that while theoretically a windfall tax on oil companies can be imposed in India, there had been no discussions on it within the Narendra Modi administration.

On Monday, responding to speculations of windfall tax, state-owned companies Oil India and Oil and Natural Gas Corporation (ONGC) said they had not heard anything from the government. “We have not received any communication on this,” ONGC Chairman and Managing Director Alka Mittal said at a media briefing.

Indeed, if a windfall tax is imposed in India, it will not only be aimed at private companies like Reliance, but also at state-owned behemoths. This means the latter may have to compromise on dividends and share buybacks, both of which the Centre is a beneficiary of.

On paper, the Centre could do with additional resource mobilisation as it faces a growing expenditure burden and a hit on revenue in FY23.

India’s fertiliser subsidy bill for FY23 could rise even further to around Rs 2.5 trillion as prices of chemical nutrients and natural gas are expected to remain elevated. The FY23 fertiliser subsidy budget estimate is Rs 1.05 trillion.

Finance Minister Nirmala Sitharaman had said on May 21 that fertiliser subsidy would require an additional outlay of Rs 1.10 trillion over and above the budgeted amount, taking the outlay to Rs 2.15 trillion. If the burden does hit Rs 2.5 trillion, that would mean extra spending of around Rs 35,000 crore.

The impact of the latest round of excise duty cuts on petrol and diesel will be around Rs 85,000 crore for the year, which the Centre will bear as the cut is on Road and Infrastructure Cess, which is not shareable with states.

Additionally, the decision to provide a subsidy of Rs 200 per gas cylinder (up to 12 cylinders) to over 90 million beneficiaries of Pradhan Mantri Ujjwala Yojana will lead to revenue foregone of Rs 6,100 crore a year for the exchequer.

Apart from the Rs 1.10 trillion increase in fertiliser, which has been already announced, the Modi government’s decision to extend the PM Garib Kalyan Anna Yojana till September will increase the food subsidy outlay for FY23 to Rs 2.87 trillion from the Budget Estimate of Rs 2.07 trillion.