In what has come as a shock to refiners like Oil and Natural Gas Corporation (ONGC) and Reliance, the government, on July 1, levied a windfall tax on profits of oil and gas companies with crude surging over 50 percent in 2022 so far. It was only May-end when the ONGC and Oil India management had said that they did not expect such a move by the government.

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Oil-to-retail conglomerate Reliance Industries, India's most valuable company, shed $19.35 billion in market value as its stock plunged as much as 8.7 percent marking its biggest intraday slide since November 2, 2020.

What has the government done?

The government has imposed a Rs 6 per litre tax on the export of petrol and aviation turbine fuel (ATF) and a Rs 13 per litre tax on the export of diesel. Additionally, it levied a Rs 23,250 per tonne additional tax on crude oil produced domestically.

The export tax follows oil refiners making a killing in exporting fuel to deficit regions such as Europe in the aftermath of Russia's invasion of Ukraine. As per media reports, some oil companies processed Russian crude oil available at a discount after it was shunned by the West and exported fuel produced from it.

What is windfall tax?

A windfall tax is a higher tax rate on sudden big profits levied on a particular company or industry.

The likes of ONGC etc. reported bumper profits in the March quarter (when international prices soared to a near 14-year high of $139 per barrel).

Finance Minister Sitharaman said that the government was happy that exports were happening and companies were making profits. "We are happy that exports are giving them that kind of return on investment. But these are extraordinary times. These are times when oil prices internationally are unbridled. For any country like India, which depends largely on imports, we also need to pay that kind of money to get imports," she said.

"If oil is not being available and is being exported with such phenomenal profits, we need some of it for our own citizens," she added. The finance minister does not believe that this discourages exports or discourages India as a refining hub. "Every 15 days this will be assessed to see how things are working out," Sitharaman assured.

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How much does the government gain?

It is estimated that the government earns 65-66 paise in taxes on every rupee that ONGC earns. The remaining is used for exploration purposes, i.e. finding more oil and gas.

The levy on crude, which follows record earnings alone will fetch the government over Rs 7,000 crore annually on about 30 million tonnes of crude oil produced domestically.

How does this help the government?

The indirect import and export curbs by duty tweaks aim to reduce the impending pressure on the current account deficit (CAD) and, thus, help the Indian rupee in return, which hit a new low of 79 per dollar on July 1.

It is noteworthy that this policy action by the government comes after the Reserve Bank of India's (RBI's) consistent intervention in all currency trading spaces to signal its support, according to Madhavi Arora of Emkay Global.

Where is the rupee currently?

The Indian rupee touched 79 for the first time against the US dollar on July 1 amid weakness in domestic equities as the greenback held its ground overseas. Rising oil benchmarks yielded pressure on the domestic currency.

Global oil prices have edged higher after OPEC+ said it would stick to its planned oil output hikes in August and investors worried about the strength of the global economy.

Clarification on SEZ and EOUs

The tax will be applicable to special economic zones (SEZ) and export-oriented units (EOU) as well.

Speaking to CNBC-TV18, Vivek Johri, the chairman of the Central Board of Indirect Taxes and Customs, said, "There are specific tax statutes in SEZ and EOU acts which give them a tax benefit. Thus noting the legal modalities, we have levied these duties which will be applicable to SEZ and EOUs. SEZ and EOUs will not get a refund of these duties."

With inputs from wires

First Published:Jul 1, 2022 3:09 PM IST