Centre will make $12bn from windfall tax on oil companies
What's the story
The Indian government has set itself up for a bumper tax revenue in the remainder of this current fiscal. According to Moody's Investors Service, the government will make close to $12 billion from the windfall taxes imposed on domestic crude oil production and fuel exports. The windfall taxes on the export of petrol, diesel, and aviation turbine fuel (ATF) was imposed on July 1.
Context
Why does this story matter?
The last few months have been quite generous toward petroleum companies. They enjoyed great margins due to sustained high crude oil prices in the international market. However, the honeymoon period has come to an end for Indian petroleum producers and exporters. The government wants its share of this lucrative pie and it has deployed its tax weaponry to obtain the same.
Terminology
What is windfall tax?
A government imposes a windfall tax on a company when the latter makes sudden unexpected profits. The Indian government has imposed a windfall tax on domestic crude oil companies due to the large profits they made amid rising crude oil prices in the international market. The domestic companies have been selling crude to domestic refineries at international parity prices, which results in windfall gains.
Information
Government has imposed tax on petrol and diesel exports
Taking into account the unexpected profits made by domestic crude oil producers, the government has imposed a Rs. 6/liter tax on petrol and ATF exports and Rs. 13/liter on diesel exports. Additionally, a Rs. 23,250/tonne cess is levied on crude oil produced domestically.
Gains
The windfall tax will offset fiscal pressure on the government
Moody's estimates the Indian government to generate additional revenue of $12 billion for the remainder of this fiscal year. The additional gains will offset the fiscal pressure on the sovereign resulting from the reduction of excise duties on petrol and diesel. The rating agency said that higher revenue will support the gradual fiscal consolidation trend despite the presence of inflationary forces.
Information
Customs duties on gold imports will balance reduced export receipts
According to Moody's, India's export receipts will be affected by the windfall taxes. However, the concurrent increase in customs duties on gold imports will limit the widening of the current account deficit.
Impact
Windfall taxes will affect the profit margins of RIL, ONGC
The windfall taxes on petroleum exports will mainly concern companies like RIL and ONGC who are chief exporters of petroleum products in the country. "The tax increase will reduce the profits of Indian crude producers and oil exporters like RIL and ONGC," said Moody's. However, the rating agency said that it is not expected to materially weaken their credit quality.
Information
High crude oil prices will support earning of oil producers
Indian oil producers and exporters will continue to enjoy their healthy margins despite a decrease in their earnings due to the windfall taxes. High crude oil prices will drive their healthy margins if the companies sustain high refining margins, according to Moody's.