The Hindu Business Line : Will windfall profits tax ease the oil price burden?

With global crude oil prices touching new highs, a debate has been triggered on measures to deal with the situation and partially insulate the consumers from the impact.

One such suggestion has been imposition of a windfall profits tax on private/joint venture oil-producing companies and private standalone refineries earning profits through import parity pricing policy.

The Left and other political parties such as the Samajwadi Party have been pressing for levy of such a tax citing examples of countries where the tax has been introduced.

Divided opinion

However, opinions vary on whether such a tax will serve the purpose in the Indian context. A lot will also depend on the mechanism being worked out for levying such a tax, industry trackers opine, stating that it is still a grey area.

A windfall profits tax is levied on oil companies because of the profits they earn as a result of the sharp increase in oil prices. Industry trackers feel that imposition of such a tax would merely mean extending the burden sharing of high crude prices on standalone refiners, and would not help much in cushioning the retail consumers. Besides, it would send a wrong signal for those who are looking at investing in oil and gas exploration in the country.

A section of the oil industry feels that such tax should not be levied as it would affect only a few companies and the benefit would not be passed on to the consumer. They argue that the objective of the Government is not to garner resources from this tax. On the issue that oil companies make gains due to high crude prices, the industry players say, “Higher crude prices are hurting oil companies, as the refiners are importing crude at higher prices and then processing it.”

However, the contrary argument is that with high crude oil prices, the product prices also go up, which is measured by gross refinery margins and this is where the refiners gain, thus the refiner should share the burden. Public sector players say that if the tax is levied in lieu of the subsidy burden which they have to bear then it may be acceptable, otherwise it serves no purpose.

Renegotiate contracts

The Communist parties have been arguing that with the crude oil prices rising sharply, it is necessary that windfall gains be recovered from all the private and joint venture oil-producing companies such as Cairn, Reliance and Essar, extracting oil and gas in India.

They point out that when these contractors participated in the exploration licensing rounds, none of them would have envisaged crude oil prices to go beyond $30 a barrel. It would not be right to allow upstream contractors additional gain of $70-80 a barrel without any extra work.

Many other countries have gone ahead and renegotiated their contracts, with a threat of imposing windfall taxes on such profits.

Similarly, private sector refiners have been allowed to keep margins for refining cost exceeding $15 a barrel while public sector companies struggle to meet their financial requirements.

The Government should impose a windfall tax on private refineries which do not contribute to meeting the oil subsidy bill.

With crude prices pushing $140 a barrel mark, concerns are being expressed on what could be the possible measures to curb its impact on the economy.

The Government has been looking at various options and coming out with suitable measures, but whether windfall profits tax finds acceptance remains to be seen.

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