What is the windfall tax on oil companies in India and how it will impact companies like ONGC, OIL and RIL?

With the prices of crude moving up sharply, the government has now called upon the oil extractors and producers to share part of their windfall gains from the spike in crude prices. The government imposed a windfall tax on all refiners, including SEZ refineries, on the export of diesel, petrol and ATF. Apart from that, the centre also imposed a cess on domestic crude output. While this offset OMC losses, it will impact upstream oil badly.

Here are the details of the big changes in windfall tax imposed. Government raised export duty on diesel by Rs13 per litre and also raised the export duty on petrol by Rs6 per litre, while the export duty on ATF was raised by Rs1 per litre. All Indian companies have to mandatorily sell 50% of petrol in the domestic market and 30% of diesel also in the domestic market before exporting. In addition, government also imposed a windfall tax cess of Rs23,250 per tonne on crude that is extracted and processed domestically.

There are no two opinions that the spike in the cost would hit the oil extractors and the oil refiners in a big way. The earnings of ONGC and Oil India for F23 are likely to be lower by 36% and 24%. Reliance is likely to see a $12/ barrel compressing in its gross refining margins (GRMs) and that is going to be a huge dent on its profits. Overall, this would be neutral to positive to the OMCs but negative for the extracting and the refining companies in India.

Crude realizations are likely to get hit by this additional cess. For instance, the higher cess on domestic crude production will lead to net crude realizations per barrel falling from $110/bbl to $107/bbl. The government has already indicated that it would do a rethink on the windfall tax only after crude comes down again to the $40/bbl levels. That is surely going to be some time away. So the windfall tax looks set to stay for some time now.

The one positive rub-off it will have is on the government revenues. It is likely to give the much needed boost at a time when the government has already foregone revenues on account of the fight against inflation. Government is likely to derive monthly revenues of Rs114,000 crore from the windfall tax on oil, This will substantially offset OMC monthly net loss of Rs11,700 crore on the sale of petrol and diesel. That is good enough to start with.