New Delhi: If the cut in excise duty on petrol and diesel late last month has led the Narendra Modi government to forgo revenue of Rs 1 lakh crore a year, a significant part of this loss is likely to be made up by the windfall gains the government is expected to earn through higher dividend from upstream oil companies in the current financial year.
According to highly placed sources in the government, the Ministry of Petroleum and Natural Gas has sent a note to the Ministry of Finance in which it has recommended two models through which the government stands to earn gains of at least Rs 84,400 crore from oil companies like Oil and Natural Gas Corporation Ltd (ONGC) and Oil India Ltd (OIL) in 2022-23.
The government has two choices — either imposing a windfall tax on extraordinary profits of the oil companies in the current year as a result of the high global crude prices, or opting for a higher dividend model. Either of these routes, if implemented, may result in windfall gains for the government.
“We are examining the note. A decision will be taken soon. But a more preferred way of collecting this money from oil companies is through a higher dividend model,” a senior official in the finance ministry told ThePrint.
Windfall tax is a one-time levy that the government may impose on the state-run oil and gas companies as well as private ones. Analysts tracking the energy sector say it is unlikely that private oil companies will accept the idea of a windfall tax.
Energy companies in India have benefitted from the increase in global crude oil prices since December last year as their average price realisation would increase. The price of India’s crude oil basket rose to a 13-week high of $121.28 per barrel on 9 June, according to data with the Petroleum Planning and Analysis Cell.
The calculation in the above-mentioned note shows that the government can expect a total payout of Rs 1.4 lakh crore from the state-run oil companies, which includes incremental cash flow of Rs 84,400 crore.
This payout will include royalty, cess, income tax, dividend, special dividend, and tax on dividend. Most of these levies will be imposed on the price realisation of above $80 a barrel, the official said.
In 2021-22, the government collected over Rs 57,000 crore in such payouts from ONGC and OIL when the average crude price was at $77 a barrel.
The government owns a 60.41 per cent stake in ONGC, while it holds around a 56.66 per cent stake in OIL. The two companies together control the majority share in the oil-producing market in India.
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Windfall tax the way out?
Discussions between the finance and petroleum departments reveal that there is consideration of a windfall tax that could be levied on oil and gas producers when oil prices rise above a certain level.
Documents regarding such a discussion seen by ThePrint show the windfall tax would be levied on the gains made by state-run oil and gas companies on oil prices above $80 per barrel at the rate of 75 per cent. Such a tax would result in a revenue of Rs 33,700 crore.
“But this amount when clubbed with royalty, cess, dividend, special dividend, income tax and tax on dividend, would yield close to Rs 1.432 lakh crore. This would have an incremental cash flow of Rs 86,000 crore,” the official said.
Last month, the UK announced a 25 per cent tax on windfall gains made by oil and gas companies.
The idea to levy a windfall tax is not new as the government had earlier mulled going ahead with it in 2018 when global oil prices touched nearly $80 a barrel in May that year. The plan was scrapped after strong opposition from private players in the oil and gas sector.
In 2021-22, India’s top oil and gas producer ONGC reported a record net profit of Rs 40,305.74 crore, up from Rs 11,246.44 crore in the previous year on the back of a steep jump in global crude oil prices.
OIL, too, reported its highest-ever net profit of Rs 3,887.31 crore, an increase of 123 per cent from the previous year’s Rs 1,741.59 crore.
The company reported a significant improvement in the average crude oil price realisation courtesy of an 80 per cent growth to $78.96 per barrel in 2021-22 as against $43.98 per barrel in 2020-21.
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Safer route of higher dividend model
While windfall tax is being considered by the government, a more plausible route seems to be asking for a higher dividend from these companies on profits that they would make by selling oil above $80 per barrel.
According to the government’s calculation, the total payout by implementing a higher dividend model would be Rs 1.415 lakh crore, with an incremental cash flow of Rs 84,400 crore — only Rs 1,700 crore lower than what the government would get by levying windfall tax.
Under this model, while royalty and cess remain the same, the income tax, dividend and the tax on dividend will be levied at a higher rate on crude price realisation of above $80 per barrel.
Another senior government official said the dividend route is a preferred route to tap on the windfall gains as the government can take advantage of good stock performance of these upstream companies by disinvesting some stake in them at higher valuations. The official explained that if the government levies a windfall tax on these companies, “the stock prices could become depressed”.
An analyst with a leading brokerage said that higher crude prices and a weakening rupee are benefitting the upstream public sector companies and these companies are likely to report record profits in the current year.
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Boost to government finances
Windfall gains of Rs 84,400 crore-86,000 crore from higher crude prices could help the government bridge a shortfall that may occur in meeting its fiscal deficit target for the financial year 2022-23.
Presenting the 2022-23 Union Budget in February, Finance Minister Nirmala Sitharaman had pegged the fiscal deficit at 6.4 per cent of the GDP, or Rs 16.61 lakh crore. More than 85 per cent of this fiscal deficit will be financed through a record market borrowing, which is estimated at Rs 14.31 lakh crore for the current fiscal year.
The government finances are severely stressed as additional spending of Rs 3 lakh crore was announced in this fiscal year’s first quarter itself. Moreover, the Reserve Bank of India paid a dividend — which usually acts as a fiscal buffer — of Rs 30,307 crore, down from the previous year’s Rs 99,126 crore. It was the lowest dividend paid by the central bank in 10 years.
(Edited by Tony Rai)
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