Windfall Tax On ONGC Will Be Damaging, Industry Experts Say

A reduction in excise duty and value added tax on fuel will be more effective in arresting retail price volatility rather than a potential windfall tax on Oil and Natural Gas Corporation Ltd.

That's the word from oil and gas expert Kirit Parikh who said the move will be damaging for the industry. A windfall tax will discourage both domestic and international companies from entering the oil exploration and production industry, keeping India dependent on imports, Parikh told BloombergQuint in an interview.

Former ONGC Chairman RS Sharma agreed. The government made windfall gains, increasing excise duty multiple times when crude prices were falling, Sharma said. “Now they are saying they are not in a position to give the relief because based on those revenues the government has launched various ambitious social welfare schemes and infrastructure projects.”

According to former Finance Secretary S Narayan, that argument is a bit “far-fetched”. “We have not seen foreign companies coming here for exploration for so many years and that's not on account of prices alone,” he said.

The Centre is considering a windfall tax on ONGC as part of a permanent solution to spiralling petrol and diesel prices which rose for the eleventh day today, newswire agency PTI said in a report quoting sources privy to the matter. The tax, which may come in the form of a cess, will kick in the moment oil prices cross $70 per barrel, the report added. Brent crude prices have risen close to 3 percent in the last one month, rising above $80 per barrel mark before trading around $79 per barrel currently.

Shares of ONGC and Oil India Ltd. fell between 10-12 percent apiece after the report.

Limited Benefit?

Parikh said consumers don't stand to benefit a lot if a windfall tax were to be imposed. “ONGC's oil production is 20 percent of the country's consumption. So if you're going to put a tax of even Rs 5 per litre on ONGC, it would only amount to a Rs 1 difference in price on the consumer end.”

The government should, instead, reduce the excise duty by Rs 1-2 per litre and ask states to reduce the value added tax on oil, he suggested, adding that the central government's revenue loss could be funded by reducing other subsidies.

Worries that an excise duty cut will put further pressure on India's fiscal deficit may be overdone, Parikh said. If revenue from the Goods and Services Tax continue to show the growth it did last month, “then worries about fiscal deficit are exaggerated”, he said.

Ajay Bodke, chief executive officer and chief portfolio manager at Prabhudas Lilladher agreed that the tax will have a negative impact but said it is the only viable option available to the government. “Every Rs 1 drop in excise leads to Rs 13,000 crore debt that the government has.”

While GST collections have shown an improvement, the government would probably like to see a sustainable increase for a year or so before depending on it to offset excise duty cuts, he said.

Other Options?

Narayan said while there's “nothing wrong” in asking ONGC to bear part of the burden, the government has other options. This could include going back to fortnightly revision of fuel prices, allowing public sector companies to cushion the price for a while or converting the ad valorem duty into a fixed excise duty.