‘Cess will help boost local fuel supplies’

The windfall tax imposed on crude oil produced in the country will prompt domestic oil producers to trim their margins while selling oil to refiners as they also have the option to use imported oil without the burden of cess, revenue secretary Tarun Bajaj said in an interview, explaining how the new tax will change the oil market dynamics and help improve domestic supplies. Edited excerpts:

How does the cess on crude producers’ windfall gains influence the market and impact exports alone without hurting fuel prices?

Right now, domestic oil producers transfer oil to domestic refineries at international parity prices. All the trade in petroleum takes place only at international prices. Upstream companies (oil exploration and production companies) are making a huge amount of profit.

Earlier, when the international price was $80 a barrel, they were selling at that price. When it has reached $120 a barrel, they are selling at this price while their cost of production remains the same. They are making windfall profits and what we are telling is to share that windfall profits.

Refineries, on the other hand, have the option of either importing crude oil or sourcing it from domestic producers. I may emphasize that there is no impact on consumers. It will improve the availability of petrol and diesel in the domestic market and, to that extent, may help the consumer.

In the case of wheat, the policy choice was an export ban to improve local supplies. Why did the government opt for a tax measure in the case of energy rather than a quantitative restriction on exports to boost local supplies?

In the case of wheat, we had an idea of how much wheat we required for ourselves. In this case, we have also become a refinery hub for the world. The whole idea is that some bit of the windfall profit oil producers are making should come to the exchequer. Some we are leaving it on the table. It is not that the government is taking everything.

When the duty has been raised, we will get some extra revenue, but we lose on income tax because the profits of producers will go down. There is something called profit petroleum, a non-tax revenue (the revenue that oil producers share with the government as part of their production-sharing contract), which will go down.

There are some counter forces to the revenue gain that will happen from the cess that is introduced. Every 15 days, we will see what the international prices are.

If the global prices go down, to that extent, the windfall gains will go down, and to that extent, the taxes will also go down. There are too many imponderables for us to pinpoint a figure for the tax receipts due to this measure, but it will be positive.

What is the rationale for fixing the cess on crude oil at 23,250 per tonne?

We tried to find what is it they were deriving out of crude oil when prices were normal and by how much crude oil price has gone up now. The cost of production might have gone up a little because of inflation but has not gone up as much. If producers were making 10 at the earlier price point and are making 60 at current prices, then they are making 50 extra, which will now be shared between the producer and the government.

You mentioned a formula to review the cess every fortnight. Could you please explain?

If the international price is $120 (a barrel) and if it falls to $100, the windfall gain goes down by $20. So we reduce the tax. As the finance minister said, this is an extraordinary situation, and extraordinary measures are needed. We have not stopped producers from exporting—and they will still export because we have not made exports a loss-making proposition.

We made it a more profitable proposition than what it was before prices had gone up (as per the cess formula). So, producers will continue to export but will share some bit of it with the government. It is a temporary measure till this situation lasts.

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