Govt may levy 'windfall tax' on ONGC, OIL to bring down rising fuel prices

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The government is likely to levy a ‘windfall tax’, in the form of a cess, on companies like Oil and Natural Gas Corporation (ONGC) and Oil India (OIL) to bring down the rising petrol and diesel prices. The move may add additional pressure to oil producers that were already paying a higher cess after the switchover of fixed amount to 20 per cent ad valorem rates in 2016.

 

According to media reports, companies that get paid at international rates for the oil they produce from domestic fields may now be asked to pay windfall tax for any revenue that they earn from prices crossing $70 a barrel. Later, the revenue will be used to pay retail majors like Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) to absorb the fuel price hike. 

 

However, industry experts are of the view that the move may wipe out the revenue of producers, who are already bleeding because of a higher 20 per cent ad valorem cess. Before 2016, this was a fixed Rs 4,500 per tonne, and by changing it to 20 per cent rate, oil companies are now paying around Rs 6,800 per tonne, much higher than the rates when crude oil prices were hovering around $100 a barrel in 2012-13.

 

“If an additional windfall tax is being levied on firms, the Centre should also relook 20 per cent ad valorem cess. Investments in this segment are highly capital intensive. Change in contracts and taxes mid-way will affect long-term investor sentiments in India and will further lead to less foreign interests in upcoming rounds of Open Acreage Licensing Policy,” said R S Sharma, former chairman of ONGC. 

 

The shares of ONGC closed 4.5 per cent down at Rs 167.65 on the BSE, after an intra-day drop of 11.4 per cent. On the other hand, OIL shares were seen 6.83 per cent down at Rs 214.80, following reports of a possible windfall tax on oil producers.   

 

The concept of a cess was first introduced on domestic crude oil production after the Oil Industry (Development) Act in 1974. Following this, a minimal cess of Rs 60 per tonne was introduced in July 1974 and increased from time to time. Later in March 2006, it was further increased from Rs 1,800 to Rs 2,500 per tonne when crude prices were in the range of $60 a barrel. Later, when prices touched $100 a barrel, it was increased to a fixed Rs 4,500 per tonne in March 2012.  At present, only companies working on pre-New Exploration Licensing Policy (NELP) and nomination blocks are paying cess, while companies like Reliance Industries, working on NELP are exempted from this.

 

“Every $1 a barrel oil price would result in revenue of Rs 12 billion. In that case, at current exchange rate, an oil price of $80 a barrel may result in an annual tax collection of around Rs 109 billion,” said an industry analyst. The Indian basket crude oil price touched $77.23 a barrel on Thursday, while Brent prices was seen at $79.09 a barrel at one point on Thursday. On the other hand, petrol and diesel prices touched a new high of Rs 77.47 per litre and Rs 68.53 per litre in Delhi on Thursday. Mumbai consumers paid the highest price in India’s history of Rs 85.29 per litre on petrol and Rs 72.96 a litre on diesel.

 

ON THE BARREL

  • Concept of a cess was first introduced on domestic crude oil production after the Oil Industry (Development) Act in 1974
  • In July 1974, a minimal cess of Rs 60 per tonne was introduced
  • In March 2012, when prices touched $100 a barrel, it was increased to a fixed Rs 4,500 per tonne
  • In 2016, Finance Minister Arun Jaitley changed it to 20% ad valorem rates