Windfall Tax On Domestic Crude Oil Cut To Zero, On Export Of Diesel Halved

The government has cut the windfall profit tax on domestically produced crude oil to zero and halved the levy on the export of diesel to Rs 0.50 per litre in line with softening international 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 reduced to nil from Rs 3,500 per tonne ($5.8 per barrel), the order dated April 3 said.

Alongside, the government cut the tax on the export of diesel to Rs 0.50 per litre from Re 1, and the same on overseas shipments of ATF remains at nil. The new tax rates come into effect from April 4, the order said. The levy was cut in line with the softening trend seen in international oil prices in the second half of March. However, oil prices have shot up this month following a surprise cut in production announced by the producers' cartel OPEC and its allies like Russia.

Commenting on the move, Sabyasachi Majumdar, senior vice president and group head - corporate ratings, ICRA Limited, said there was a moderation in crude oil prices closer to the last revision in special additional excise duty (SAED) on March 21, 2023, hence the reduction in the duty. "However, crude oil prices have jumped since the OPEC+ announcement of additional production cuts of 1.16 million barrels per day. Hence, the SAED can be expected to increase in the next revision if the crude prices remain elevated," he said.

The tax rates are reviewed every fortnight based on average oil prices in the previous two weeks. The Government's collection from the SAED imposed on the production of crude oil and the export of petroleum products from July 1, 2022, is estimated at around Rs 40,000 crores in FY2023. Crude oil pumped out of the ground and from below the seabed is refined and converted into fuels like petrol, diesel and aviation turbine fuel (ATF).

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

A Rs 23,250 per tonne ($40 per barrel) windfall profit tax on domestic crude production was also levied. The export tax on petrol was scrapped in the very first review and that on ATF was done away with at the March 4 review. Reliance Industries Ltd, which operates the world's largest single-location oil refinery complex at Jamnagar in Gujarat, and Rosneft-backed Nayara Energy are primary exporters of fuel in the country.

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