Windfall tax cut on crude may not impact companies and govt: Analysts

Analysts say move in line with falling global oil prices and shrinking upstream profits

The windfall tax on domestically produced crude oil being slashed to zero is not expected to have a significant impact on the government's revenue or the tax burden of upstream oil companies, analysts said on Wednesday. The move is in line with falling global crude prices, and subsequent shrinking of profit of domestic oil producers, they stressed.

On Tuesday, the Centre brought down the tax to nil, down from Rs 1,850 per tonne and Rs 2,100 per tonne in the two previous fortnights. Classified as the Special Additional Excise Duty (SAED), windfall tax is levied on domestically produced crude oil, and export of diesel, petrol, and jet fuel (ATF). The tax rates are reviewed every fortnight based on average oil prices in the previous two weeks. It had been slashed to nil once before, on April 4, 2023.

 

"The impact of the windfall tax on oil companies was limited recently, since oil prices have been around $70-72 per barrel. In the latest fortnightly period, the windfall tax on domestically produced crude had been Rs 1,850 per tonne, which translated to Rs $3 per barrel," Prashant Vasisht, senior vice president and co-group head, corporate ratings, at ICRA Limited told Business Standard.

“Since the imposition of the tax, the realisations of upstream companies has been in the range of $70-75/barrel. So, removing the tax is not expected to impact the oil companies much," he added.

Windfall taxes are designed to tax the profits a company derives from an external, sometimes unprecedented, event — for instance, the energy price-rise as a result of the Russia-Ukraine conflict. But falling global prices of crude have punctured the justification for the tax.

Debasish Mishra, chief growth officer, Deloitte South Asia, said upstream oil companies may not be earning supernormal profit recently, thereby removing the justification for a windfall tax. "International crude prices have corrected to around $70 per barrel with a downward bias due to the demand scenario. Given the geology — the cost of producing crude remains high in India — domestic oil producers may not have been earning much windfall profit," Mishra said.

No revenue impact

The move is also not expected to have significant revenue implications for the exchequer, Mishra added. "The government's revenue realization from windfall tax has not been as significant as its realizations from the excise duty on sales of petrol and diesel," he pointed out.

Analysts believe the latest cut in the tax is along expected lines. "Back when the windfall tax was first imposed in August, 2022, the government had said it would revisit the imposition of windfall tax in case global crude prices fall to about $70 per barrel. It has been brought to nil as part of the last review since global prices had fallen to that level," Vasisht said.

Case in point, the tax has slowly climbed down from Rs 7,000 per tonne in end-July, in line with falling global crude prices. Global crude prices have fallen every month since April, when it had breached the $90 per barrel level. Last week, benchmark Brent crude futures prices fell to a 33-month low of $69 per barrel over weak demand and concerns of oversupply.