Windfall Taxes Reduced: Shares of Reliance Industries Limited (RIL), ONGC, and Chennai Petrochem surged on Wednesday after government cut windfall taxes on fuel exports. The decision came after oil prices in the international market had declined. In early trade, RIL shares rose over 4 per cent, ONGC gained as much as 7 per cent, and Chennai Petroleum Corp jumped 11 per cent.
Other refining and petrochem companies, including Tamil Nadu Petrochem, Indian Oil, and Bharat Petroleum jumped up to 3 per cent.
The central government has eliminated the Rs 6 a litre tax it imposed on the export of petrol from the beginning of the month, and reduced export taxes on diesel and aviation turbine fuel by Rs 2 a litre from Rs 13 and Rs 6 per litre respectively. The additional excise duty on domestic crude has been reduced by 27 per cent to Rs 17,000 per barrel. The new rates will be effective from Wednesday.
On July 1, India imposed the taxes and joined a number of other nations placing windfall levies to tap energy companies’ gains. However, international fuel prices have cooled since then, eroding profit margins at both oil producers and refiners.
Windfall tax is a tax levied on companies whose financials have been boosted purely by luck, or events for which they are not responsible. The idea to impose the cess on domestic crude production by upstream firms was to tax “windfall gains” from their sales at international parity prices to the refiners; while the tax on exports of transport fuels was intended at reversing the refiners’ growing tendency to sell in the export markets overlooking the domestic need.
Brent crude prices have cooled off by $15-20 per barrel (bbl) in the last two-three weeks to about $100/bbl now, resulting in a crash in the refining spreads of diesel, petrol and aviation fuel and reducing the windfall gains for crude oil producers as well.
Oil prices fell slightly in early Asian trade on Wednesday, pressured by global central bank efforts to control inflation and ahead of expected builds in US crude inventories as product demand weakens. Brent crude prices fell 39 cents or 0.5 per cent to $106.96 a barrel by 0045 GMT.
Further speaking about the impact of the taxes imposed by the government, CLSA said, “The spot refining spread of gasoline (petrol) has fallen to near the 15-year average. A US$12/bbl windfall tax on this takes the realised refining spread down to a near loss-making level of just US$2/bbl. Similarly, the diesel spread after the export tax of US$26/bbl would be a meager US$2/bbl. Although the spot Brent crude and ATF spreads are still above 15-year averages, post-windfall tax these imply realisations way below their 15-year averages.”
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