Windfall profit tax on crude oil slashed; tax on diesel, ATF export cut

The government has slashed the windfall profit tax levied on domestically-produced crude oil as well as on export of diesel and ATF following a decline in global oil prices, according to an official order.

The levy on crude oil produced by companies such as Oil and Natural Gas Corporation (ONGC) has been cut steeply to ₹1,700 per tonne from ₹4,900, according to the order dated December 15.

Crude oil pumped out of the ground and from below seabed is refined and converted into fuel like petrol, diesel and aviation turbine fuel (ATF).

The government has also cut the tax on export of diesel to ₹5 per litre from ₹8 and the same on overseas shipments of ATF to ₹1.5 a litre from ₹5. The new tax rates are effective from December 16.

The reduction in tax rates follows a 14% slump in global crude oil prices since November.

India first imposed windfall profit taxes on July 1, joining a growing number of nations that tax super-normal profits of energy companies. At that time, export duties of ₹6 per litre ($12 per barrel) each were levied on petrol and ATF and ₹13 a litre ($26 a barrel) on diesel.

A ₹23,250 per tonne ($40 per barrel) windfall profit tax on domestic crude production was also levied. Export tax on petrol has since been scrapped.

The tax rates are reviewed every fortnight based on average oil prices in the previous two weeks.

“India’s fortnightly windfall tax revision on oil producers was on expected lines,” Morgan Stanley said, commenting on the move.

Windfall tax on domestic oil production declined from about $8.3 per barrel to $2.8. “The adjustment, while still ad hoc, highlighted the cap on the producer oil price at around $75 per barrel and on profitability at $20-26 per barrel,” it said.

Export tax on diesel has been reduced from $15.7 per barrel to $9.6 and jet fuel saw a decline from $9.6 a barrel to $2.9.

Reliance Industries Ltd., which operates India’s largest only-for-export oil refinery at Jamnagar in Gujarat, and Rosneft-backed Nayara Energy are primary exporters of fuel in the country.

“RIL’s gross refining margin under the new tax regime is now $15.1 per barrel (as 30% of refinery output is subject to this tax), and increased with lower crude loss, crude discount, petcoke gasifier benefit and decline in export taxes,” Morgan Stanley said.

The implied diesel and jet fuel cracks, adjusted for the windfall tax, average $15 per barrel and $26 a barrel, respectively.

“We remain bullish (on) the refining cycle and see upside risks to regional margins despite investor concerns around China exports as global inventories continue to unwind,” it added.

The basket of crude oil that India imports averaged $77.88 per barrel in December as against $87.55 last month. It averaged $91.70 per barrel in October.

Similarly, the price of diesel has also come down to $105.70 per barrel this month from $123.18 in November and $133.52 in October.

The government levies tax on windfall profits made by oil producers on any price they get above a threshold of $75-76 per barrel.

The levy on fuel exports is based on cracks or margins that refiners earn on overseas shipments. These margins are primarily a difference between the international oil price realised and the cost.