The Indian government has slashed the windfall tax on domestically produced crude oil by over 34 percent to bridge the anomaly and bring it in line with international prices. The move aims to align the domestic market with the overseas one and facilitate Indian producers to become competitive in the world market. The decline will allow Indian producers to sell their output in the global market if they find exports competitive.
According to the government notification, the windfall tax on crude oil has been reduced to Rs 4,600 a tonne, effective August 1, from Rs 7,000 a tonne fixed two weeks ago. Collected in the form of Special Additional Excise Duty (SAED) and revised on the fortnightly basis, the Windfall Tax was fixed at Rs 6,000 a tonne for the first fortnight of July. The Windfall Tax on diesel, petrol, and jet fuel, or Aviation Turbine Fuel (ATF), was retained at ‘nil’.
Data compiled by Polymerupdate Research showed crude oil prices declined by over 5 percent in the period between July 16 and 31 due to indications for weakening demand in China and inventory building in the United States. The benchmark Brent crude futures for near-month delivery at the Chicago Mercantile Exchange (CME) declined by 5 percent to US$80.72 a barrel by the end of July 2024 from the level of US$84.85 a barrel on July 16. Similarly, Western Texas Intermediate (WTI) futures for near-month delivery at the New York Mercantile Exchange (Nymex) plunged to US$77.91 a barrel from US$81.91 a barrel during the second fortnight of July 2024.
| Applicable Windfall Tax or Special Additional Excise Duty (SAED) |
| Effective date | Duty (Rs) |
| August 1, 2024 | 4,600 |
| July 16, 2024 | 7,000 |
| July 2, 2024 | 6,000 |
| June 15, 2024 | 3,250 |
| June 1, 2024 | 5,200 |
| May 16, 2024 | 5,700 |
| May 1,2024 | 8,400 |
| April 16, 2024 | 9,600 |
| April 3, 2024 | 6,800 |
| March 16, 2024 | 4,900 |
Source: Ministry of Finance, Government of India, and Polymerupdate Research
Humble beginningFirst imposed on July 1, 2022, India joined a host of other nations that imposed supernormal profits earned by energy companies due to sudden spurt in crude oil prices. From July 2022, India started taxing crude oil production and exports of gasoline, diesel and aviation fuel to regulate private refiners that wanted to sell fuel overseas instead of locally to gain from robust refining margins.
A government notification stated that the windfall tax on domestically-produced crude has seen a series of revisions since the additional duty was introduced in 2022. The latest downward revision indicates a rebound after raising the tax to Rs 7,000 two weeks ago. The windfall tax is collected to regulate India crude oil producers who prefer to sell fuel overseas rather than domestically to benefit from strong international prices.
The windfall tax has undergone several revisions this year alone. With rising crude oil prices, the windfall tax reached a record high of Rs 9,600 a tonne effective April 16, 2024. However, this tax brought down to Rs 8,400 a tonne two weeks later. Similarly, SAED on locally originated crude oil was brought down to Rs 3,250 a tonne on June 15, 2024.
Normally, the windfall tax is tweaked in sync with the movement in international crude oil prices. Changes in the tax behaviour have a direct bearing on the profitability of domestic crude oil producers such as ONGC Ltd, and Oil India Ltd. Therefore, the increase in the windfall tax would hurt these public sector companies. However, it remains to be seen whether these companies pass on the tax increase to consumers. It is worth mentioning here that the government has already slashed prices of crude oil derivatives such as petrol, diesel, and aviation turbine fuel (ATF). Value-added products such as polymers and plastics have also seen a substantial decline in their prices in recent months.
The general formula for this supernatural tax is based on specific criteria. The windfall tax is activated when global benchmark rates soar beyond US$75 a barrel for domestic crude oil or when product cracks, indicating the margin discrepancy between crude oil and final petroleum products, exceed US$20 a barrel for diesel, ATF, and petrol exports. Presently, crude oil prices are hovering around US$83 a barrel, approximately US$8 a barrel higher than the minimum threshold for the implementation of the windfall tax of US$75 a barrel.
China worriesCrude oil demand is likely to decline in China, world second-largest economy, due to weak industrial activity. China’s official agency National Bureau of Statistics (NBS) reported faster industrial growth at 3.6 percent in June compared to 0.7 percent gain registered in May. For the January-June 2024 industrial growth remained stable at 3.5 percent compared to 3.4 percent registered during the January-May 2024 period. However, the recovering growth in the industrial output was contrasted by a slowing economy across other sectors.
The April-June 2024 quarter growth forecast of the consumer sector indicates weakness amid job market woes and a protracted housing downturn. Alarmingly, roughly half of more than 10 mainland-listed beverage firms in China had released forecasts for January-June 2024 earnings forecasts with a loss-making period. China, the world’s second-biggest economy, is trying to provide heavier monetary stimulus to prop up its fragile economy, surpassing markets for a second time last Tuesday by conducting an unscheduled lending operation at steeply lower rates.
It is worth mentioning that authorities cut several benchmark lending rates following a meeting with the top government leadership, which had mapped out other major reforms. The NBS data further showed that state-owned firms reported cumulative profits up by 0.3 percent in the January-June 2024 period, foreign firms posted a gain of 11 percent, and private-sector companies reported a profit rise of 6.8 percent.
DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com
