Why the cut in windfall tax may not be such good news for oil producers

In what will come as a major relief to oil and gas companies, the central government has reduced the windfall tax on crude oil to Rs 9,500 a tonne from Rs 11,000. The reduction in the tax is over 13%.

From November 2, oil companies will pay less windfall tax, as the price of crude in the global market stabilises. 

The cut in the windfall tax on the sale of locally produced crude oil comes at a time when global oil prices have largely remained tepid around $95 per barrel. 

Why is the windfall tax imposed in the first place?

The windfall is tax levied as a special additional excise duty and is aimed at absorbing the super profits earned by domestic crude oil producers.  

In the wake of the Ukraine war, as global prices of crude began going up, the windfall tax was imposed on oil producers like Reliance, ONGC, Oil India and Cairn India. The tax is reviewed and revised every fortnight. 

But is it all good news for oil producers?

Not really. As it cut down on the windfall tax, the government raised the special additional excise duty on export of aviation turbine fuel from Rs 3.5 a litre to Rs 5 a litre. 

Also, the special additional excise duty on export of diesel has been increased from Rs 12 a litre to Rs 13 a litre, showed the notification.

Why is the global crude oil market continuing to be so volatile?

The volatility in the oil prices continues as the fresh Covid restrictions across Chinese cities have raised demand concerns as China is the second largest importer of crude in the world and talks of a price cap on Russian gas has ensured that supply fears persist.

Having said this, weaker economic data from China and increase in oil production in the US are expected to keep the prices subdued going ahead. According to monthly data from the US Energy Information Agency (EIA), oil production in the US rose to nearly 12 million barrels per day in August, the highest since the onset of the Covid-19.