Foreign oil majors flag windfall tax concerns; govt seeks $52-bn investment

At least two major foreign oil majors have cited India’s windfall tax regime as a challenge to their plans of investing in the oil exploration and production sector during discussions with the government, said senior industry and government sources.

Post-contract changes in taxation rates have been a major worry for foreign oil-producing companies, even as they draw up plans to enter India’s promising market, they told Business Standard.

“The windfall tax is levied on domestically produced crude and the export of diesel and aviation turbine fuel (ATF), covering the entirety of the oil business. The rate is reviewed every fortnight and often changes by a wide margin. This makes financial planning for any business tough, leave alone a major oil producer,” said a senior industry executive at a foreign oil major.

The issue has been brought up at multiple meetings between foreign oil majors and the government since last year, said another executive. It has also been raised at meetings held on the sidelines of the three-day India Energy Week 2023 summit, he added. 

Participants have stressed the need for a stable policy and tax architecture for the sector. The resistance to windfall tax may throw a spanner in the works for the government’s stated plans of securing $58 billion of investments in the upstream oil sector in 2023.

Companies such as US energy majors ExxonMobil and Chevron, French multinational TotalEnergies, and London-based BP have evinced interest in investing in India.

Need for investments

India is the world’s third-biggest oil importer and consumer and meets almost 85 per cent of its oil requirements from overseas.

In the past two years, the government has ramped up plans to raise domestic crude oil production. The government has opened at least 1 million square kilometres of areas for domestic exploration, which were earlier classified as ‘no-go’.

It is also working to raise the country’s total crude refining capacity to 450 million tonnes per annum (mtpa), up from the current 250 mtpa.

India’s share in global oil demand is 5 per cent. This is expected to rise to 11 per cent. Earlier this week, Prime Minister Narendra Modi had asked foreign investors to come in at this promising time.

Arguing that India’s energy demand growth would be growing at 3x the rate of the rest of the world, he said investing in India would have the ‘best rate of return’ for companies.

On Wednesday, Petroleum Minister Hardeep Singh Puri said while investments in a gamut of new technology are needed to safeguard the future, capital needs to flow into traditional hydrocarbons, such as crude oil, to ensure energy security for India.

No tax change

Officials, however, said windfall tax is here to stay.

“There has been no inter-ministerial discussions where any government stakeholder has said windfall tax should be scrapped. It is here to stay,” said a petroleum ministry official.

Crude oil prices witnessed extreme volatility in 2022, resulting in very high prices for end-consumers at petrol pumps, as well as major revenues for oil producers.

Countries have implemented various measures to mitigate the adverse impact on consumers. The government maintains that windfall tax is one of the measures that helps in dealing with the situation.

On February 5, the government raised the windfall tax on domestic crude to Rs 5,050 per tonne, up from Rs 1,900 per tonne. Tax on the export of diesel was hiked to Rs 7.5 per litre, from Rs 5, and the same on overseas shipments of ATF went up to Rs 6 per litre, from Rs 3.5 per litre.