In July, the Indian government started levying a hefty additional excise duty on crude oil in the name of 'windfall gains' to upstream companies. The magnitude of greed shown by the government can be understood from the fact that the tax originally imposed was Rs. 23,250 per ton or $46 a barrel! The crude was around $110 at that time and average realization for Indian companies was around $92 a barrel.
Even if we assume the government has a right to take away 50% of the so called 'windfall gains', imposition of $46 as windfall tax implies the entire realization of $92 is 'windfall gains' in the eyes of the government and normal crude price is zero!
It is a big anomaly that the government raised excise duty on petrol and diesel by rupees 13 and 16 respectively between March and May 2020 when crude touched a record low of $20 but took it back in May this year when the crude was around $110. So, on one hand $110 rate of crude was 'cheap' when the question was of levying enhanced excise duty on fuels and at the same time the companies were earning 'windfall gains' at the same rate of crude i.e. $110 a barrel!
And the rationale put forth for imposing this 'windfall gains tax' is that it has been imposed to make good the loss due to 'reduction' in excise duty on petrol-diesel. Which reduction? It was just a withdrawal of enhanced excise duty it had imposed during low crude prices in 2020, not 'reduction' as propagated by the government. At the time when it had enhanced excise on fuels in March and May 2020, it was stated to be a temporary levy to take benefit of record low crude prices. But later on, it became a permanent right of the government. It can be inferred from the intent of the government that it has permanently added one more tax on petroleum industry. Indian consumers pay roughly 70-75% of fuel prices to governments in various taxes and levies including newly forced 'windfall tax'. Still, India is a 'socialist' country.
When the crude fell to $20 in 2020 and the upstream companies were incurring huge losses by selling crude below their production cost, the government did nothing to compensate their losses. The companies were incurring losses on natural gas till recently when the price was capped at $1.79 per mmbtu in India but the government never came as saviour. As soon as the prices rose, the government was prompt in imposing suppressive taxes in the name of 'windfall gains'. So, when the companies were incurring losses, the same was borne by their shareholders. But as soon as companies started making profits, the government came forward to collect almost entire of it at the cost of the shareholders. It is the shareholders who will always suffer whether oil prices are high or low and the government will continue to enrich.
For example, the share price of crude producer ONGC touched a low of Rs. 50 around the time when crude hit a record low of $20 a barrel in April 2020. Since then, crude kept on rising to hit a high of $139 in March this year. At the same time, price of natural gas increased by 379% from $1.79 to $8.57 per mmbtu. But the exuberance in prices could not seep into share price. The government offloaded its 1.50% stake in ONGC in March 2022 at Rs. 159 per share when crude was around $112. Subsequently, it imposed this 'windfall tax' when crude was at the same level but due to imposition of this hefty levy, the share price fell to Rs. 120 per share in July. Ultimately, the government is enriching itself at the cost of minority shareholders by misusing its taxing powers as a sovereign. This is grave violation of principles of corporate governance.
The contention of the government that it needs funds to cover up lost revenue due to 'economic fragility' in the aftermath of covid is not tenable. GST collection in July 2022 has increased by 45% than December 2019 (immediately before the onset of Covid). Similarly, direct tax collection in 2021-22 reached to Rs. 14 lakh crore when compared to Rs. 10.50 lakh crore in 2019-20 recording a 34% growth in two years. This is arguably the highest revenue growth during this period for any government in world.
In last 90 days, though the government has cut the windfall levy on crude to Rs. 8,000 a ton after a sharp correction in crude prices but has not completely abolished it. Today, average realisation for upstream companies is around $75 a barrel. Of this, the government is still taking away $16 as windfall tax implying a normal crude price at just $43 a barrel!
Not only the upstream companies but refiners (HPCL, BPCL, IOC) are also suffering badly. The three companies together posted a record loss of Rs. 18,480 crore in quarter ended June 2022. Reason? Crude prices were higher and excise on petrol-diesel are also very high. Govt. doesn't let companies increase fuel prices to avoid anger of voters. Nor does it reduce excise on fuels. The only option left was to instruct upstream companies to compensate for a part of loss incurred by refiners as used to be done earlier. Instead, government decided to exploit upstream companies for its own unjust enrichment resulting in bad fate for shareholders. If the crude remains at the current level during the balance part of the year, a significant part of net worth of the three refining companies will get wiped out. To meet these huge losses, these companies are borrowing aggressively endangering their long term stability. The worst part, the government had sold its entire shareholding in HPCL to ONGC 4 years back at Rs. 474 per share and the current share price of HPCL is just half of that. Who has suffered? Obviously the minority shareholders of ONGC. ONGC was then traded at Rs. 200 per share and crude was at $70. Today, crude is 20% higher. Still, both the companies (ONGC and HPCL) are trading at 40-50% lower. Clearly, the shareholders of ONGC were forced to acquire a company (HPCL) at the peak of price cycle at 14% higher price than the prevailing market price of HPCL. Using its sovereign powers to exploit minority shareholders in a PSU (ONGC) by selling its own holding in another PSU (HPCL) at the peak of industry cycle and that too at 14% higher than prevailing market price of the target company is mockery of the principles of corporate governance.
The government could have gained from higher crude prices by another more legal, ethical and pro-business manner by mandating upstream companies to pay a higher dividend. But the government did not want minority shareholders get their 'fundamental right as investors' i.e. share in profits. Instead, it has snatched entire gains as taxes. Despite of being a hardcore BJP worker, I feel aggrieved by unfair treatment meted out to investors and consumers.
If the government seriously wants to save the petroleum industry, it must immediately abolish 'windfall tax' in all forms and cut excise duty on fuels; else, the day is not far when we will see the petroleum industry faltering the same way telecom and aviation companies vanished.
The author is a senior Chartered Accountant and a lawyer and has been freely expressing his opinions on economic, social and political issues at different platforms.
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