Windfall Tax Gains May Not Be Sufficient To Compensate Oil Retailers

The finance ministry is considering compensating oil marketing companies for their losses in the first quarter of the ongoing fiscal, but the revenue generated from windfall tax alone may not be enough.

The windfall tax gain charged by the government may not be sufficient to fully cover the costs, two officials told BQ Prime on the condition of anonymity.

Last week, Bloomberg reported that the government was mulling more than a Rs 20,000-crore bailout for state-run fuel retailers to compensate for their losses and keep a check on cooking gas prices.

On Sept. 16, India slashed the windfall tax on export of diesel and aviation turbine fuel and reduced the cess on crude oil to Rs 10,500 a tonne. First imposed in July, the windfall tax was lowered as international prices of crude and crude products eased.

Union Petroleum Minister Hardeep Singh Puri, speaking at an event in Mumbai, has said a "financial cushion" must be provided to state-run OMCs to save them from defaulting. The government was looking at methods to funnel funds, he said, adding a subsidy would eventually be a charge on the public exchequer.

Morgan Stanley Research estimates that the expected compensation to fuel retailers in India at $2.5 billion (Rs 20,000 crore) was arrived at considering the losses of OMCs since October 2021. Though OMCs are currently breaking even on LPG sales to households at $92 a barrel rate of Brent Oil, they still suffered losses in the first quarter of the year, it said.

State-owned OMCs have suffered marketing margin losses and reported around Rs 18,500-crore loss in the first quarter of this fiscal as the regulated retail fuel price remained unchanged since April 6.

But it may be too early to speculate on how much loss OMCs have suffered with respect to LPG and how the government will compensate.

It would be difficult to ascertain how much of these losses were on account of petrol and diesel (liquid fuel) and LPG, according to NR Bhanumurthy, vice-chancellor at BASE University. “We must also factor in the margins these companies would have gained from the import of Russian oil and the rupee-trade,” he told BQ Prime.

According to Morgan Stanley, the current integrated margins on fuel are also positive. “With the current integrated margins (refining + marketing) on fuel near $6-8 a barrel, we see OMCs recovering most of the year-to-date losses by end of FY23 if Brent Crude averages near $95 a barrel mark.”

BQ Prime’s emails sent to the expenditure department at the finance ministry remained unanswered.

Fuel Pricing Mechanism

The prices of petrol and diesel are market-determined in line with international product prices, exchange rate, tax structure, inland freight and other cost elements.

But the price to consumer for domestic LPG is modulated by the government insulating it from international volatility. The LPG subsidy is accordingly credited directly to the bank accounts of eligible beneficiaries.

Also, in May, as part of its measures to fight inflation, the government started a targeted subsidy of Rs 200 per 14.2 kg cylinder under the Pradhan Mantri Ujjwala Yojana beneficiaries for up to 12 refills a year for year 2022-23. During the pandemic, three free refills were provided to Ujjwala customers.

The subsidy on domestic LPG is paid to consumers by OMCs and is reimbursed by government to OMCs periodically.

To a Rajya Sabha response earlier this year, Puri said while the Saudi Contract Price (India’s import benchmark for LPG) has risen about 207% from $236/MT in April 2020 to $725/MT in July 2022, the retail selling price of 14.2 kg domestic cylinder has gone up from Rs 744 in April 2020 to Rs 1,053 in July 2022—that’s by 41.5%.