Shares of Reliance Industries Limited (RIL) and ONGC surged on Thursday after media reports that the government might lower the recently implemented windfall tax in a meeting on Friday. RIL shares rose 2.4 per cent, ONGC gained as much as 6.6 per cent, and Chennai Petroleum Corp jumped 4.2 per cent.
According to Bloomberg, the government is considering lowering the recently implemented windfall tax. This comes on the heels of declining global crude oil prices due to which profits of fuel exporters and oil producers have reduced.
Windfall tax is, simply, a tax levied on companies whose financials have been boosted purely by luck, or events for which they are not responsible. For instance, energy companies have benefitted from the global spike in energy prices on account of Russia’s invasion of Ukraine.
Bhavik Patel, senior commodity/currency research analyst at TradeBulls Securities, said: “The fall in crude oil prices from $126 to $94 (a fall of 25.3 per cent) in the span of 6 weeks has prompted the government to reconsider lowering the windfall tax. Indian officials are expected to meet on Friday to consider lowering taxes. Keeping in view that the government had earlier stated that they will assess the levies every 15 days, now the government is in the mood to take action as prices have fallen significantly in recent terms.”
On July 1, the government announced export taxes and imposed restrictions on exports of petrol, diesel and aviation turbine fuel (ATF). Domestic producers were asked to pay a cess of Rs 23,250 per tonne on crude oil as a windfall tax. Domestic producers made windfall gains on high international crude prices, which reached as high as $122 per barrel recently. Now, crude oil prices have fallen below $100 per barrel.
Global oil prices have fallen about 20 per cent in recent weeks on concerns of a US recession coupled with China’s struggle to move beyond a debilitating period of Covid curbs. Margins on diesel, gasoline and aviation fuel have crashed in the past two weeks, squeezing profits of India’s top fuel exporter Reliance Industries Ltd (RIL) and oil producer Oil and Natural Gas Corporation.
Impact of Lower Windfall Tax on Fuels Refiners
Private refiners such as Reliance and Rosneft-backed Nayara Energy Ltd. are the biggest losers from the export tax as the two make up 80 per cent to 85 per cent of India’s overall gasoline and diesel exports, according to industry experts.
Patel said: “This news will be beneficial for OMCs and private refineries like RIL and ONGC. Not only may we see some jump in their share prices due to a change in sentiment but if the government does reduce windfall tax, we would see more sustainable upside in RIL and ONGC as reducing taxes would also help in increasing the bottom line for the companies.”
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