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Energy Windfall Tax Is Credit Negative for Some Oil Firms, Says Moody’s

The government’s move comes to curtail exports in order to meet the demand of the domestic market first, which is increasing due to the ongoing post-Covid-19 recovery

Tax

Last week’s decision by the government to impose export tax on petrol, diesel, and jet fuel (ATF) shipped overseas by private and public sector companies and also charge a windfall tax on crude oil produced locally by both private and state-owned companies may hurt their profits but would not materially weaken them, Moody’s investor services has said.

In a report titled, “Tax Policy India: Energy windfall tax is credit negative for some oil firms but relieves fiscal pressure”, Moody’s said, the tax increase would reduce the profits of Indian crude producers and oil exporters like Reliance Industries Limited (RIL) and Oil and Natural Gas Corporation Ltd, but “we do not expect the rise in tax payments to materially weaken the companies’ credit quality because their margins will continue to be healthy”.

Last week government had announced the imposing of windfall gain taxes with immediate effect on the export of petrol, diesel and aviation turbine fuel (ATF), and on the domestic production of crude oil. The government had also mandated exporters to meet the requirements of the domestic market first.

Moody’s said that high crude oil prices will support the earnings of oil producers. And while profits generated from oil exports will fall because of windfall taxes, they will likely remain higher than the levels over April 2020 to March 2022 if refining margins are sustained at the highs seen in April to June this year.

Meanwhile, significant additional tax revenue will offset fiscal pressure on the sovereign. “We expect this government measure to be temporary and that taxes will be eventually adjusted according to market conditions, including considerations related to inflation, external balances and currency depreciation.”

Following the government’s announcement, Indian oil companies will have to pay ₹6 per liter (around $12.2 per barrel) on exports of petrol and ATF, and ₹13 per liter (around $26.3 per barrel) on exports of diesel. At the same time, upstream producers will have to pay taxes of ₹23,250 per ton (around $38.2 per barrel) of crude oil produced in India.

Moody’s said that based on the production of crude oil and export of petroleum products in India in the fiscal year ended on March 31, 2022 (fiscal 2021), the government will generate close to $12 billion of additional revenue for the remainder of fiscal 2022. The additional revenue will help to offset the negative impact of a reduction in excise duties for petroleum and diesel announced in late May.

“Higher revenue also supports our view that the gradual fiscal consolidation trend will continue, notwithstanding associated risks posed by the current inflationary environment such as higher subsidy spending,” the report said. The increase in government taxes will limit the earnings upside for RIL’s exports but will not materially affect its solid credit quality and excellent liquidity. RIL is the largest exporter of petroleum products from India. In the fiscal year that ended in March 2022, the company generated about 41% of consolidated EBITDA from its oil-to-chemicals business.

The increase in taxes on crude oil production will reduce ONGC’s margins, but this is mitigated by current high oil prices and the company’s low cost of production. India’s higher export duties for fuel products will curtail export receipts, but the concurrent announcement of higher customs duties on gold imports will serve to limit a further widening of the current account deficit. The country’s large foreign exchange reserves remain sufficient to preempt any issues concerning the repayment of external debt despite the weakening of the rupee, the report added.

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