Windfall Taxes On Domestic Crude Oil And Fuel Exports Will Generate $12 Billion: Moody's

The central government on July 1 imposed windfall gain taxes on the export of petrol, diesel, and aviation turbine fuel, and on the domestic production of crude oil

Moody's said the tax increase will reduce the profits of Indian crude producers and oil exporters like RIL and ONGC.

Moody's Investors Service on Tuesday said the windfall taxes on domestic crude oil production and fuel exports will generate close to $12 billion (Rs 94,800 crore) for the government in the remainder of the current fiscal year, while slashing profits of companies such as Reliance Industries (RIL) and Oil and Natural Gas Corporation Ltd (ONGC), the PTI reported.

The central government on July 1 imposed windfall gain taxes on the export of petrol, diesel, and aviation turbine fuel (ATF), and on the domestic production of crude oil. It has also mandated exporters to meet the requirements of the domestic market first.

Moody's said, “The tax increase will reduce the profits of Indian crude producers and oil exporters like RIL and ONGC.”

According to the report, following the government's announcement, Indian oil companies will have to pay Rs 6 per litre (around $12.2 per barrel) on exports of petrol and ATF, and Rs 13 per litre (around $26.3 per barrel) on exports of diesel. At the same time, upstream producers will have to pay taxes of Rs 23,250 per tonne (around $38.2 per barrel) of crude oil produced in India.

“Based on the production of crude oil and export of petroleum products in India in the fiscal year ended on March 31, 2022 (fiscal 2021), we estimate that the government will generate close to $12 billion of additional revenue for the remainder of fiscal 2022,” the rating agency said.

The additional revenue will help to offset the negative impact of a reduction in excise duties for petrol and diesel announced in late May to tame surging inflation.

In May 2022, the government announced a cut in the excise duty of Rs 8 per litre on petrol and Rs 6 a litre on diesel, which is estimated to have reduced its revenues by Rs 1 lakh crore.

Moody's said, "Significant additional tax revenue will offset fiscal pressure on the sovereign," while adding, "We expect this government measure to be temporary and that taxes will be eventually adjusted according to market conditions, including considerations related to inflation, external balances and currency depreciation.”

Moody's said higher revenue also supports its view that the gradual fiscal consolidation trend will continue, notwithstanding associated risks posed by the current inflationary environment, such as higher subsidy spending.

"India's higher export duties for fuel products will curtail export receipts, but the concurrent announcement of higher customs duties on gold imports will serve to limit a further widening of the current account deficit. The country's large foreign exchange reserves remain sufficient to pre-empt any issues concerning the repayment of external debt despite the weakening of the rupee," it said.