WINDFALL TAX

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 WINDFALL TAX


Why in news?

With global oil prices easing, the Centre slashed the windfall tax levied on crude oil producers, reduced the export tax on Aviation Turbine Fuel (ATF) and diesel and scrapped the duty on petrol exports.

 

Recent Cut in Windfall Taxes, Levies:

·       The Centre cut the windfall tax on diesel and aviation fuel shipments by Rs 2 per litre.

·       It also removed additional excise duties of Rs 6 per litre on exports of petrol.

·       Additionally, the windfall tax on the domestically produced crude oil by about 27 per cent to 17,000 rupees a ton.

·       The Centre also exempted petrol, diesel and ATF from levy of duties when exported from refinery units located in Special Economic Zones.

 

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.

 

Why Did Government Implement Windfall Taxes?

·      the central government slapped export duties on petrol and ATF (Rs 6 per litre or USD 12 per barrel) and diesel (Rs 13 a lire or USD 26 a barrel) and imposed a windfall tax on domestic crude production (Rs 23,250 per tonne or USD 40 per bbl).

·      The aim was to garner more revenue and limit export to address the fuel shortage in the country.

·      As exports are becoming highly remunerative, it has been seen that certain refiners are drying out their pumps in the domestic market.

·      In view of this, cesses equal to Rs 6 per litre on petrol and Rs 13 per litre on diesel have been imposed on their exports.

·      These cesses would apply to any export of diesel and petrol from the country.

 

Impact of Windfall Tax:

·       The last two weeks have seen a massive crash in the refining spreads (or margins) of diesel, gasoline (petrol) and aviation fuel (ATF) coinciding with a cool-off in crude prices from their respective peaks seen in June.

·       Post windfall tax, the realised spread on diesel and petrol fell to near loss-making levels while the realisation on aviation fuel (ATF) and crude had also gone below 15-year averages.

·       A USD 12 per barrel windfall tax on this takes the realised refining spread down to a near loss-making level of just USD 2 per barrel.

·       Similarly, the diesel spread after the export tax of USD 26 per barrel would be a meagre USD 2 a barrel.

·       For oil producers, the windfall levy took away 40 per cent of their earnings. On top of it, they also paid royalty and cess.

 

Why Govt Reduces Windfall Taxes and Other Levies:

·      Global crude oil prices have tumbled since mid-June amid concerns about a potential recession.

·      Returns from processing gasoline and diesel in Asia have plunged in recent weeks.

·      Considering the current situation, the Centre has decided to eliminate a levy on gasoline exports and reduced windfall taxes on fuel exports.

 

Who will Get the Benefit?

·       This move will help companies such as Reliance Industries Limited, Oil and Natural Gas Corporation, Oil India Limited and Russia’s Rosneft-backed Nayara Energy.

·       A quicker than expected restart to reverse the windfall taxes on the sector should normalise equity multiples steadily higher.

·       While windfall taxes are not yet zero, we believe government action provides clarity on the path ahead. Reliance Industries, ONGC, and Oil India are key beneficiaries.

 

Source: https://epaper.thehindu.com/Home/ShareArticle?OrgId=GQ4A2ARIQ.1&imageview=0

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