Government Reversal On Windfall Tax May Cut Revenue By Rs 185 Billion: Nomura

The decision of the Union government on Wednesday (20 July) to reduce the export tax on aviation turbine fuel (ATF) and diesel, and scrap such duties on petrol exports, is estimated to cut the total levy from fuel exports from Rs 664 billion (0.24 per cent of gross domestic product or GDP) on an annualised basis to Rs 211 billion (0.08 per cent of GDP).

The cut in windfall tax levied on crude petroleum producers is likely to reduce the annualised tax revenue by Rs 185 billion (0.07 per cent of GDP) to Rs 505 billion (0.18 per cent of GDP), according to a Nomura analysis.

The decision comes amid a decline in global oil prices as the government undertook the first planned review of the fresh taxes that were imposed on export of petrol, fuel and ATF on 1 July 2022. Oil prices fell as much as $2 a barrel on Wednesday with Brent crude prices for September at $105.67 a barrel.

Following the levies, Indian oil marketing firms were required to pay Rs 6 per litre on exports of petrol and ATF, Rs 13 per litre on exports of diesel and upstream producers were levied taxes of Rs 23,250 per tonne of crude oil produced in India.

The export taxes on petrol, diesel and ATF addressed the issue of lower domestic prices incentivising refiners to export products at higher prices, resulting in domestic fuel shortages.

Besides the cess, exporters were mandated to ensure 50 per cent of the quantity in the shipping bill for domestic supply. The windfall tax in the form of a cess of Rs 23,250 per tonne was imposed on domestic crude production to garner more revenue from producers that sell crude to domestic refineries at international parity prices.

The measures were found to be non-inflationary without any expected improvement on the current account by Nomura analysts who, while suggesting a positive impact on the Centre’s fiscal finances by Rs 1.1 trillion (0.4 per cent of GDP), were unsure whether the taxes would sustain throughout the year.

Now with this review, the windfall tax on diesel and aviation-fuel exports has been slashed by Rs 2 a litre, cess on petrol of Rs 6 a litre has been removed and tax on domestically produced crude oil has been brought down from Rs 23,250 per tonne of petroleum crude to Rs 17,000 per tonne, as per a government notification.

According to a Nomura analysis, the cut in windfall tax levied on crude petroleum producers is likely to reduce the annualised tax revenue by Rs 185 billion (0.07 per cent of GDP) to Rs 505 billion (0.18 per cent of GDP). After these cuts are made, the implied fiscal windfall in financial year 2022-23 is expected to amount to nearly Rs 570 billion, or around 0.2 per cent of GDP.

Though there is no relief where the current account deficit is concerned, Nomura suggests that at the margin, the reduction in export duties on fuel is expected to be positive for export growth though only the merchandise trade data for July-August will really show whether there was a material deterioration in oil exports due to the imposition of taxes.

The bigger worry is over external sector risks which also remain elevated in financial year 2023 (FY23), with record high monthly trade deficits.

According to the report, even as delayed reopening in India is likely to keep domestic demand robust for the foreseeable future, import demand in the case of some products like crude oil and vegetable oil in the wake of rapid post-pandemic normalisation, gold with inflation hedge, coal in view of domestic shortages and chemicals factoring in higher fertiliser imports and rising domestic demand is seen as remaining relatively price inelastic and adding to the import bill.

Besides, with exports already displaying a downturn which will escalate in the second half of 2022, the overall impact is likely to keep the current account deficit pressures high through FY23.