Govt cuts Windfall tax on fuel export & domestic crude output

While Rs 6/litre export duty on petrol was scrapped, tax on export of diesel and ATF was cut by Rs 2 per litre each to Rs 11 & Rs 4 respectively

NEW DELHI: The government on Wednesday scrapped a windfall tax on the export of petrol and cut the levy on overseas shipments of diesel and ATF as well as on domestically produced crude oil following a decline in global oil prices.

While the Rs 6 a litre export duty on petrol was scrapped, the tax on the export of diesel and jet fuel (ATF) was cut by Rs 2 per litre each to Rs 11 and Rs 4 respectively, government notifications showed.

The tax on domestically produced crude was also cut to Rs 17,000 per tonne from Rs 23,250, a move that will benefit state-owned Oil and Natural Gas Corporation (ONGC) and Vedanta Ltd.

Also, correcting the anomaly that crept in when the windfall taxes were slapped on July 1, the government exempted fuel exports from refineries located in export-focused zones from the levies. The move will benefit Reliance Industries whose exports had become uncompetitive due to the export levies that were as high as $26 per barrel.

Reliance shares closed 2.47 per cent higher at Rs 2,501.40 a piece on the BSE. the stock of ONGC rose 4 per cent to Rs 132.55, while Vedanta stock closed 6.22 per cent higher at Rs 253.45 a piece.

India imposed windfall taxes on July 1, joining a growing number of nations that taxes super normal profits of energy companies. But international oil prices have cooled since then, eroding profit margins at both oil producers and refiners.

International crude prices slumped on concerns of a potential global recession, which was mirrored in cracks or margins on diesel, petrol and ATF falling.

The July 1 export duties of Rs 6 per litre on petrol and ATF translated into $12 per barrel, while Rs 13 a litre tax on diesel was equivalent to $26 a barrel. The Rs 23,250 per tonne windfall tax on domestic crude production equalled $40 per barrel.

The realised spread on petrol after considering the tax was near a loss-making level of just $2 per barrel, while the diesel spread too was a meagre sum.

For oil producers, the windfall levy, which was separate from the royalty and cess they continue to pay, took away 40 per cent of their earnings.

This as, petrol cracks have dipped to $10 per barrel in July from $34.6 in June (currently below $3 per barrel), diesel cracks fell to $34.9 from $48.9 per barrel and Jet/kero cracks declined to $28 per barrel from $41.6.

The cut in windfall tax will benefit Reliance, which operates two oil refineries at Jamnagar, in Gujarat with one focused only on exports. 55 per cent of its refining production comes from its export refinery.

“We estimate the gross refining margin (GRM) impact for Reliance could now decline to $1 per barrel vs a potential $9-10 per barrel impact earlier,” Citi said. The reduced tax now translates into $29 per barrel for crude oil producers and $22 a barrel on diesel and $8 on ATF).

At the time of imposing th windfall tax, the government had stated that the objective behind the move was to shore up domestic supplies as refiners were preferring to export than to meet the local requirements.

But an export levy on onlyfor-export refineries did not make sense as those units aren’t meant to supply fuel to the domestic market. And that anomaly has now been corrected.

“This will also ensure that the government’s exportfriendly image is not hurt,” CLSA said.

State-owned ONGC and Oil India Ltd as well as private sector Vedanta Ltd, who account for almost all of the crude oil produced in the country, will benefit from the cut in windfall tax.

The $11 per barrel cut in windfall tax reflects the Government’s approach to limit net oil realization for upstream industry at around $75 per barrel.

“We expect the duty structure to remain dynamic and move along with the crude oil prices,” brokerage Haitong said.

Besides Reliance, Russia’s Rosneft-backed Nayara Energy, which operates a 20 million tonnes a year refinery at Vadinar in Gujarat, will also benefit from the cut in the export levy.

The windfall tax on crude production alone was estimated to generate revenue of Rs 65,600 crore and tax on export products another Rs 52,700 crore if they were to be continued for the full year. The reduction in tax rates will change these calculations.

The tax on domestically produced crude was cut to Rs 17,000 per tonne from Rs 23,250, a move that will benefit Oil and Natural Gas Corporation (ONGC) and Vedanta Ltd