One-off tax cut and how it benefits Indian oil and gas companies

Suddenly, your wish is granted. The atmosphere changes and it starts to rain. Sweet raindrops that make you feel good.

A real relief, right?

Well oil refining companies feel the same way today.

Recently, the oil and gas sector was under pressure because of the windfall tax.

The Indian government earlier this month announced a windfall tax that is expected to negatively impact the country’s oil and gas companies.

However, stock prices of oil refining companies are finally on the rise today.

ONGC, Reliance Industries, GAIL among others saved a lot of time when the government reduced windfall tax.

But why was the windfall tax levied and what has suddenly changed today?

Keep reading to find out…

Why has the oil and gas sector been under pressure lately?

Almost all major companies in the energy sector were under pressure.

Reliance Industries stock price was down.

GAIL’s stock price was no exception, and neither was ONGC.

International crude oil prices were rising like there was no tomorrow. Domestic oil refinery revenues were booming because they sold oil at international parity prices.

Thus, the oil industry was making windfall gains due to the global rise in crude oil prices.

While oil refineries rejoiced at these high revenues, the government was scared. Indeed, rising oil prices run counter to the public interest.

The government had two concerns, the domestic rise in oil prices and the shortage of supply for domestic needs.

So, to curb the windfall earnings of oil refineries, the government introduced a windfall tax on oil refineries.

As the name suggests, a windfall tax is a tax levied by the government only in the event that the industry makes unfair windfall gains. The tax is only levied in the public interest.

Thus, to control the rise in the domestic price of oil and meet domestic gasoline needs, on July 1, 2022, the government introduced an exceptional tax.

The export duty of ₹6 per liter was levied on automotive fuel, including gasoline and aviation turbine fuel (ATF). A special excise duty of ₹13 per liter was also levied on the export of diesel. This decision would affect both exporters and refiners, including GAIL India.

Additionally, a loss of ₹23,250 per ton was to be levied on domestically produced crude oil. This would negatively impact the revenues of state-owned oil and gas producers as well as private actors.

As a result, shares of oil and gas companies fell. Dependency had dropped 8% when the tax was announced, and CGSB dropped 15% after the announcement.

So what has changed today?

Crude oil prices have finally cooled.

After rising rapidly, international crude oil prices are finally falling. Due to this drop in prices, the government planned to reduce taxes on windfall profits.

Finally, the government today announced a reduction in windfall taxes. The center reduced the windfall tax on locally produced crude to ₹17,000 per tonne and also reduced the levy on diesel exports by ₹2 and aviation fuel exports would be reduced by ₹2 per liter.

It also exempted the special additional excise duty levied on exports when made from the special economic zone.

As a result, shares of Reliance jumped 4% today while ONGC rebounded 7%. Chennai Petroleum rebounded more than 10% while MRPL also climbed 5%.

Why the reduction was so necessary…

The windfall tax reduction was badly needed. The center had already announced that it would revise the exceptional tax every 15 days.

With geopolitical tensions around the world finally easing, global oil prices are expected to finally return to normal in the near future.

Growing awareness and demand for electric vehicles (EVs) and ethanol were already posing a threat to crude oil prices.

Therefore, investors should carefully consider the global oil scenario before investing in the oil and gas industry.

Good investment!

Disclaimer: This article is for information only. This is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com

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