Rs 94,800-cr gains from windfall tax an overestimation: Govt sources

At July 1 rates, revenue gains would be less than Rs 48,000 crore if impact on corporation tax is taken into account

The government would have earned less than Rs 48,000 crore in the nine months of the current fiscal year (2022-23, or FY23) if the windfall tax rates remained constant. It termed the figure of Rs 94,800 crore floating around as an ‘overestimation’, said two senior government officials.
 

Now that the rates have been reduced, the government will get less revenue, although it is difficult to assign any figure due to oil price volatility, one of the officials said.

They are of the view that Rs 94,800 crore does not take into account the effect of windfall tax rates on corporate profits and corporate taxes.
 

“If someone said $12 billion (Rs 94,800 crore), he has ignored what would have come on its own. If you adjust for those (profit petroleum and corporate tax), less than half of that gross figure would have been possible if rates were constant,” added the source.

However, he said the windfall rates have come down. “Things will change based on oil price movement,” he averred.

Some of the incremental revenues are overestimated by the fact that there are substitutions of these revenue for something that might have otherwise come as corporate tax or some other sort of revenue, including profit sharing in petroleum, he said.

“The estimates put out are just too high,” he said.

When the government had imposed windfall tax for the first time on July 1, Moody’s Investors Service said this would generate close to $12 billion (Rs 94,800 crore) for the government in FY23, while trimming profits of firms like Reliance Industries (RIL) and Oil and Natural Gas Corporation (ONGC).

The government had imposed windfall tax on domestic production of crude at Rs 23,250 per tonne and on the export of petrol, diesel, and aviation turbine fuel (ATF) at the rate of Rs 6, Rs 13, and Rs 10 per litre, respectively, on July 1. This was expected to yield Rs 94,800 crore.

However, the government later slashed the tax on domestic production of crude to Rs 17,000 per tonne on June 20, withdrew it on the export of petrol, and cut it on diesel and ATF to Rs 11 and Rs 4 per litre, respectively.

On Tuesday, the Central Board of Indirect Taxes and Customs revised the levy and increased the tax rate on the domestic production of crude to Rs 17,750 per tonne with effect from Wednesday. Also, the duty on ATF exports was withdrawn and the one on diesel reduced to Rs 5 per litre.

The source defended the scrapping of windfall tax on exports of petrol, saying the refined margins are gone, the windfall evaporated. “As windfall vaporises, so will the tax,” he said.

It will benefit the economy since oil prices have come down, he said.

“It also reduces the burden on oil-marketing companies (OMCs). It’s a self-correcting mechanism. If the tax revenue goes up, it means oil prices are very high. It’s not a good thing. It’s a mechanism where if things are adverse, we will earn more revenue. If oil prices come down, as they have in the past fortnight quite substantially, we will get less revenue,” he said.

Meanwhile, the  frequent revision in the windfall tax rates lends uncertainty to oil companies, particularly domestic producers.

However, experts have backed the move, given the very nature of the windfall tax and the volatility of global crude prices.

They said, however, the government should offer clarity on how the receipts will be utilised and follow the UK’s example of providing discounted bills to low-income groups.

While the recent changes will hit oil producers such as ONGC and Vedanta, the move will help exporters like RIL.

Krithika Jaganathan, joint partner at Lakshmikumaran & Sridharan Attorneys, said while the windfall tax does not impact the public, some lucidity is required as to how this revenue will be utilised.

“For example, the UK announced discounted energy bills to low-income households using the receipts from windfall taxes. This is a great opportunity for the government to balance energy efficiency and inflation as well,” said Jaganathan.

Bank of Baroda chief economist Madan Sabnavis said windfall tax should have a fixed rate and tenure. Since it is being imposed on oil companies, it does enhance uncertainty.

“Hence, companies should make internal calculations based on their assessment of a proper price and profit to brace for this uncertainty. The government on its part has to fine-tune these rates as there is little it can do about such externalities,” he said.

Prashant Vasisht, vice-president and co-head of corporate ratings at ICRA, said although tinkering with these rates frequently creates uncertainty, considering the high level of prices (crude prices consistently above $100 per barrel, crack spreads of gasoil above $30 a barrel), a number of countries have imposed windfall taxes and accordingly as a measure per se, India is not the only country to implement this.”

India Ratings & Research chief economist Devendra Pant said with global crude prices being extremely volatile, the windfall tax rates need to be looked at periodically.

The finance ministry source said there has been a substantial change in the past two weeks.

“Such substantial change in prices will trigger a change. A minor change may not,” he said.

The rate of the Indian crude basket stood at $100.41 a barrel as on August 2, against $105.49 on average in July and $116.01 in July.

Ahead of a meeting of Organization of the Petroleum Exporting Countries members, Brent crude futures fell 94 cents to $99.6 per barrel in early trade on Wednesday.