Windfall Tax Trimmed For Domestic Crude, Diesel, ATF; How Does It Impact Oil Companies, Consumers?

Amidst rising crude oil prices owing to the Israel-Hamas conflict, the Indian government has trimmed the windfall tax on domestic crude, export of diesel and aviation turbine fuel (ATF) with effect from October 18th. The chalk down of windfall tax on these crude-related products is expected to provide much-needed relief to consumers and also support petroleum stocks in the tight market supply.

Windfall Tax Cut:

In a notification on October 17th, the Finance Ministry said that the special additional excise duty (SAED) on crude petroleum will now be Rs 9,050 per tonne from October 18. This is a sharp decline from SAED of Rs 12,100 per tonne which was imposed On September 29 and came into effect from September 30.

Also, the duty on the export of diesel is slashed by Rs 1 per litre to Rs 4 per litre from Rs 5 per litre. Further, the duty on jet fuel or Aviation Turbine Fuel (ATF) is reduced to Rs 1 per litre compared to earlier Rs 2.5 per litre. However, SAED on gasoline continued to be zero.

India first levied windfall profit taxes on July 1, 2022. The windfall tax refers to a tax levied on an unforeseen or unexpectedly large profit.

Here's how the latest windfall tax cut will impact!

As per Nirpendra Yadav, Senior Commodity Research Analyst at Swastika Investmart, the windfall tax was imposed on account of the supernormal profits earned by energy companies because of lower crude prices. However, the recent rise in crude prices on account of the Israel-Hamas conflict led to the Government cutting down on windfall tax. Reduction in windfall tax may help to maintain the margins which were affected on account of rising crude prices.

Yadav added, "India's lower windfall tax on crude petroleum may give some relief to Indian consumers and will support crude petroleum stocks amid a tight market supply of crude petroleum products. Currently, the additional supply cut in crude oil by major oil producers Russia and Saudi Arabia supports the crude oil prices. while the recently broken-out war between Israel and Hamas is accelerating the prices of crude oil. The tight supply amid lower demand for crude oil due to the economic slowdown in major economies has capped the gain to some extent. However, rising geopolitical issues are making crude petroleum more expensive for consumers. And despite reducing Special Additional Excise Duty, crude petroleum companies' margins may remain under pressure.

But he also believes, that once the geopolitical tension begins to reduce, it may support the stock of crude petroleum companies, and an upward move in the stock is likely to be seen in the coming days.

Meanwhile, Kaushik Dani Fund Manager - PMS, Abans Investment Managers said that the latest cut in windfall tax by the government is more of realigning itself to the crude prices. He added, "It is actually reversing a part of the tax that was raised last month when Crude had crossed $97. Windfall tax has now been a regular feature to generate additional revenues for the Centre as oil producing companies make extra-ordinary profits when crude moves up."

Although the recent cut in special additional excise duty (SAED) on crude petroleum, diesel and ATF is positive for OMCs, Manish Chowdhury, Head of Research, StoxBox however also believes that it would be more sentimental in nature and any upside from this development should not last for long.

Chowdhury added, "With crude oil prices firming up in the wake of the Israel-Hamas conflict, these companies are facing increased pressure on their margins and would not be surprised to see a further reduction in SAED going forward as it was introduced to tax super-normal profits of energy companies. We, thus, remain cautious over the outlook for OMCs going forward."

Lastly, Vaibhav Shah, Fund Manager, Torus Oro PMS said, the windfall tax was imposed on account of the supernormal profits earned by energy companies because of lower crude prices. However, the recent rise in crude prices on account of the Israel-Hamas conflict led to the Government cutting down on windfall tax. Reduction in windfall tax may help to maintain the margins which were affected on account of rising crude prices.