What Is It; How Will It Impact Companies, Govt Revenues?

Domestic producers will now pay a cess of Rs 23,250 per tonne on crude oil as a windfall tax. After the decision was announced on Friday, shares of oil refining and marketing companies saw a decline as their earnings are going to be hit by the move. The levy has been imposed as the domestic companies have been making large profits amid rising crude oil prices in the international market. Here’s what is windfall tax and how it will impact companies:

What Is A Windfall Tax?

A windfall tax is a one-off tax imposed by a government on a company. It is levied on an unforeseen or unexpectedly large profit, especially unfairly obtained. Now, international crude prices have risen sharply in recent months. The domestic crude producers sell crude to domestic refineries at international parity prices. As a result, domestic crude producers are making windfall gains.

Taking this into account, a cess of Rs 23,250 per tonne has been imposed on crude.

Brent crude futures for September on Monday slipped 36 cents, or 0.3 per cent, to $111.27 a barrel at 0300 GMT, having jumped 2.4 per cent on Friday.

How Will It Impact Companies?

As the companies will now have to pay a cess of Rs 23,250 per tonne on domestic crude oil, their margins will get impacted. Revenue Secretary Tarun Bajaj on Friday told Reuters that the windfall tax will drop only if crude falls $40 per bbl from current levels.

Analysts at Morgan Stanley Research in a report said that a higher cess on domestic crude production of $40 per barrel for ONGC and OIL India was a negative surprise and should imply downside risks for the sector. It impacts ONGC and OIL India earnings for FY23 by 36 per cent and 24 per cent, they said.

They also said export taxes, restrictions and windfall taxes on oil producers are a global trend and highlight the tightening energy market outlook.

The finance ministry, however, said this cess will have no adverse impact, whatsoever, on domestic petroleum products/fuel prices. Further, small producers, whose annual production of crude in the preceding financial year is less than 2 million barrels will be exempt from this cess.

Also, to incentivise an additional production over preceding year, no cess will be imposed on such quantity of crude that is produced in excess of last year production by a crude producer. This measure would not impact crude prices or the prices of petroleum products and fuels.

How Much The Government Is Likely To Earn?

The tax on crude oil producers like Oil and Natural Gas Corporation, Oil India Ltd and Vedanta alone will fetch the government Rs 69,000 crore annually considering 29.7 million tonnes of oil production in 2021-22 fiscal (April 2021 to March 2022), according to a PTI report quoting sources.

For the remaining nine months of the current fiscal, the levy would get the government almost Rs 52,000 crore if the tax remains in place till March 31, 2023. On top of this, the new tax brought in on the export of petrol, diesel and ATF would bring in additional revenue.

Apart from windfall tax on crude oil, the government has also imposed cesses equal to Rs 6 per litre on petrol and Rs 13 per litre on diesel on their exports.

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