Govt cuts windfall tax on crude oil, export levy on fuels. All you need to know
In what is good news for upstream energy companies like ONGC and Reliance Industries, the central government has cut its windfall tax on crude oil and exports of aviation turbine fuel (ATF) and diesel, according to a notification dated Jan. 16.
So, what is the reduction in the taxes?
The government has cut the windfall tax on crude to Rs 1,900 ($23.28) per tonne from Rs 2,100 per tonne, effective Tuesday.
The government has also cut the export tax on ATF to Rs 3.5 per litre from Rs 4.5 per litre, and cut the export tax on diesel to Rs 5 per litre from Rs 6.5 per litre, the notification said.
Why is this important in the overall scheme of things?
India, a major consumer and importer of oil, has been buying Russian crude at well below a $60 price cap agreed by the West.
How much oil does India produce domestically?
Domestically-produced crude oil, which makes up for 15 per cent of all oil consumed in the country, is priced at international rates.
Why was the windfall tax imposed in the first place?
The government in July imposed the windfall tax on crude oil producers and levies on exports of gasoline, diesel and aviation fuel after private refiners sought overseas markets to gain from robust refining margins, instead of selling more cheaply at home.
How frequently are tax rates revised?
The tax rates are revised every fortnight based on prevailing international rates. The levy on petrol export has since been abolished.
Is there a chance that the windfall tax may be phased out this year?
The government has not said so but a Fitch report had recently said that the windfall tax may be phased out in 2023.
In December, Fitch said it expects the tax, which was imposed in 2022 in the wake of elevated crude prices, to be phased out on the back of moderating oil rates.
"We expect the windfall taxes on domestic crude oil production levied by the government in 2022 to be phased out in 2023 with moderating prices," Fitch said in its APAC Oil & Gas Outlook 2023.
What did Fitch say about downstream companies such as retailers and refiners?
Fitch expects oil marketing companies' marketing margins to recover and partly recoup 2022's losses, given its modestly lower crude-price assumptions.
"However, refining margins may ease to mid-cycle levels from all-time highs though still remaining healthy, which should support improvement in OMCs' credit metrics," Fitch said adding upstream companies will see robust cash flow despite some moderation from very high levels in 2022 and higher domestic gas prices.
The rating agency said downstream oil refining and fuel retailing companies will continue to have high capex during FY24 as they invest in expanding refining capacity and retail networks.
Fitch said limited balance-sheet buffers and neutral-to-negative free-cash-flow limit HPCL's and BPCL's credit profit headroom in FY24, despite improving profitability and lower working-capital needs.
Fitch expected credit profit headroom for Indian Oil Corp to improve, aided by its more diversified operations than the other two OMCs.
What did Fitch say about upstream companies such as ONGC and RIL?
The rating agency said that capex for upstream companies will be driven mainly by their continuing efforts to expand production.
"Reliance Industries' large investment plans for its existing oil-to-chemicals and new energy businesses are likely to be funded largely through internal accruals, supporting its low leverage," it said.
"We believe strong upstream cash flow of ONGC and OIL should support their financial profiles in FY24 despite high capex intensity mainly at their subsidiaries; ONGC's strong upstream operations offset HPCL's downstream losses during 2022," it added.
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