Windfall Tax Slashed By 37.5% On Domestic Crude: Excise On Petrol, Diesel, ATF; Oil Price Outlook

Windfall tax is slashed by 37.5% to Rs 3,250 per tonne on domestically produced crude oil. Earlier, the windfall tax was at Rs 5,200. Notably, the excise duty on the export of petrol, diesel and aviation turbine fuel (ATF) continues to remain zero.

This will be the second cut in windfall tax in June alone. Earlier, on June 1, the windfall tax was brought down to Rs 5,200 from Rs 5,700 as of May 16, 2024.

This year, the windfall tax has undergone a series of revisions. The highest windfall tax price was at Rs 9,600 announced on April 16, 2024, but was soon brought down to Rs 8,400 on May 1, 2024.

The latest revision in SAED to Rs 3,250 has come into effect from June 15, 2024.

The government first imposed windfall tax was effective from July 1, 2022. During this time, the Centre levied a special additional excise duty of Rs 6 per litre each on petrol and ATF, and Rs 13 per litre duty on the export of diesel. While the windfall tax was at Rs 23,250 per tonne for the sale of domestic crude. It also increased customs duty from 10.75% to 15% to curtail the current account deficit (CAD).

The need for a windfall tax emerged when crude oil prices were extremely volatile in 2022, resulting in very high prices for end consumers at petrol pumps. To mitigate the adverse impact on consumers, "Windfall tax" is one of the measures which helps in dealing with the situation. The extent of its applicability, reference period, amount of cess/ tax/ duty, incidence of tax liability, and mechanism for review are integral to such a tax.

Going ahead, brokerage Motilal Oswal believes risks to a strong oil price outlook in the medium term are rising as OPEC+ strategy shifts from "managing" oil prices to "protecting market share".

Motilal's note added that the shift in strategy is being driven by OPEC+ production stagnating between 42-45mb/d since Jan'22 even as US oil production is set to rise 6% in the CY22-25 period.

Also, the brokerage mentioned that fiscal breakeven oil prices for key OPEC economies, Saudi Arabia and UAE, have
declined to USD85/bbl and USD54/bbl now, respectively, from USD94/bbl and USD78/bbl in 2015. Thus, a USD90/bbl oil price level, which was a compulsion in 2015, is a mere wish in 2024 for the Middle East producers.

Coming to non-OPEC players that will influence sentiment in crude oils ahead, Motilal said, "With USD40-50/bbl free cash flow (FCF) breakeven for US shale players and their robust balance sheets, we think non-OPEC supply growth, especially from the US, will continue to accelerate in CY25 and beyond, posing risk of a supply glut."

Currently, Brent Crude is at 82.62 in August expiry, while US WTI crude is at 78.49 as of June 15. YTD, Brent is up by 8.5%, and that of WTI witnessed a surge of 9.5%.