India’s Finance Ministry announced a 6% reduction in the windfall tax applicable on domestically produced crude oil. Updated every two weeks, this tax was introduced last year in response to soaring crude oil prices following Russia’s Ukraine conflict in 2022. The recent revision brings the windfall tax down to Rs 6,700/ton from the previous Rs 7,100/ton. Oil Marketing Companies (OMCs), including the government-owned Oil and Natural Gas Corporation (ONGC), will benefit from this tax cut.

Tax Changes

SAED: While the windfall tax applicable on domestically produced crude oil has decreased, the Ministry has raised the SAED (Special Additional Excise Duty) on diesel exports to Rs 6/litre, up from Rs 5.50/litre. However, there has been no change in the SAED for petrol, which remains zero.
ATF: Additionally, the windfall tax on aviation turbine fuel (ATF) exports has increased to Rs 4/litre, compared to Rs 2/litre in the previous fortnight.

Background

India introduced the windfall tax on crude oil producers in July 2022, extending it to gasoline, diesel, and ATF exports. This decision was made as private refiners looked to capitalize on strong refining margins in international markets instead of selling domestically. It marked the first time that India imposed export duties on petrol, ATF, and diesel, with SAED applicable on all goods and revenue being shared between central and state governments.

International Price Impact

The windfall tax is updated regularly based on movements in global crude oil prices. When international crude oil prices rise, Indian companies exporting crude oil derivatives enjoy increased profits, prompting the government to raise the additional tax. Conversely, when prices decline, the government reduces the tax to compensate for potential lower revenue and profits for domestic oil processing firms.

Stable International Prices

International crude oil prices remained relatively stable in the second half of August 2023, driven by global economic uncertainties. Tensions in the economies of the United States and China, the world’s two largest economies, contributed to this stability. During this period, Brent crude oil traded within a narrow range, with prices ranging from US$83.21 to US$86.83 per barrel.

Production Cuts & Price Stabilization

In July 2023, crude oil prices rose due to production cuts announced by the Organization of the Petroleum Exporting Countries (OPEC) and its allies (OPEC+). These production cuts, which included an additional 1 million barrels per day reduction by Saudi Arabia, aimed to support global crude oil prices. The prices had initially dropped following the Russia-Ukraine Conflict. Western nations had imposed sanctions on Moscow, leading to efforts to reduce dependence on Russian energy supplies.

Transition To Renewable Energy

In response to energy security concerns and the need to reduce reliance on fossil fuels, many European countries began transitioning to renewable energy sources, particularly solar and nuclear power. These measures reflect a broader global shift toward sustainable and cleaner energy alternatives.

OFB’s Insight

India’s windfall tax reduction on domestically produced crude oil provides relief to oil marketing companies. It aligns with the stable international crude oil prices and India’s commitment to balance the interests of the energy sector. As the global energy landscape evolves, nations continue to adapt to ensure energy security and environmental sustainability.