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Stocks unlikely to be impacted by windfall tax removal

Stocks unlikely to be impacted by windfall tax removal
  • The finance ministry has recently cut windfall tax on upstream oil producers to zero.
  • Windfall taxes were imposed in July to reduce the super profits being obtained from high energy prices.
  • In immediate response, shares of Indian Oil, ONGC and Oil India gained but market experts say that the taxes will have no actual effect on the stocks.
Windfall tax or the Special Additional Excise Duty (SAED) on domestically produced crude petroleum has been reduced from ₹4,100 per tonne to nil with effect from May 16, 2023. It had earlier been reduced from ₹6,400 per tonne to 4100 on May 1, 2023.

These tax rates are reviewed every fortnight by the finance ministry based on the average crude oil price The windfall tax on petrol, diesel and aviation turbine fuel remains at zero.

Prashant Vasisht, VP and co-group head of corporate ratings, ICRA said, "The government has slashed the special additional excise duty (SAED) on production of crude oil to nil from ₹4,100 per tonne w.e.f. May 16, 2023. Crude oil prices have been on a downward trend, erasing all the gains that were witnessed post the OPEC+ production cuts. The decline has been largely owing to the recessionary fears in large economies of the world."

Windfall taxes refer to levies that seek to reduce an unanticipated level of profit that a company or industry is obtaining due to an event or situation, and not their business decision.

The government had first imposed windfall profit taxes of ₹23,250 per tonne in July 2022 to keep the price realization of upstream producers between $75 and $80. Upstream oil producers like ONGC, Oil India and GAIL were making supernormal profits through sales to the international market because of the supply crisis created by the Russia-Ukraine conflict.

The windfall tax has been slashed to nil once before, on April 3, 2023 as a result of oil prices dipping below $75 in March. However, it was reintroduced on April 18, after prices rose following OPEC’s announcement of production cuts in early April.

Following the latest announcement on Monday 15th, shares of Reliance Industry Limited dipped while those of Indian Oil, ONGC and Oil India rose. However, market analysts say that these gains are continuous with shares increasing from before the announcement was made and that the removal of the tax will have no actual effect on upstream oil producer’s shares.

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