Why windfall tax on oil firms can be hare-brained and counterproductive

Why windfall tax on oil companies would be hare-brained and counterproductive

S Murlidharan

If the consumers can be burdened with backbreaking fuel taxes, goes the reasoning, there is no reason why the government should have qualms about taxing the oil producers. /Representational image | Photo credit: Andrzej Rembowski from Pixabay

Indian bureaucracy, government and regulators are often inspired by and enamored of the examples and precedents set by the US and the UK governments. Against this backdrop, expectation is rife that the government could emulate the UK which last week, levied a 25 percent windfall tax on oil and gas producers’ profits to raise $6.3 billion to help fund its package of support for households.

Should the government succumb to the temptation, our domestic oil producers ONGC and Oil India in the public sector and Cairn Energy in the private could be in the firing line with ONGC especially booking a bumper last quarter profit in the fiscal 21-22 on the back of surge in oil prices triggered by the Ukraine war.

Alka Mittal, the Chairman and Managing Director of ONGC has said no such communication has been received by her company from the government. So far so good.

The Indian government did toy with the idea of imposing such tax at the height of oil prices scaling new highs in 2008 and 2018. Speculation in the Indian media pn whether the Indian government will bite the bullet this time round and impose such tax is not without basis given the fact that the Narendra Modi government has all along been looking to fuel as a milch cow to bankroll its welfare schemes including administering COVID vaccines.

If the consumers can be burdened with backbreaking fuel taxes, goes the reasoning, there is no reason why the government should have qualms about taxing the oil producers who get paid international prices for their domestic production.

It is precisely here where the rub lies. A business, especially with global linkages, is subject to vicissitudes. More so the oil business. Prices go up and down sharply with geo-political considerations tilting the scales. To be sure, OPEC and non-OPEC oil producing countries often do not see eye to eye on production cuts and price fixation. Yet when a crisis like the Ukraine war looms, prices do escalate.

Russia, which is deeply embroiled in the war, is after all a major player in the oil market and the US call to the countries of the world to boycott its oil and gas has indeed created the scarcity psychosis, a sure recipe for rise in prices.

Should the government react to each gyration in the market in a knee-jerk fashion and tweak corporate tax rates? The answer is no. The government can by all means nudge the oil PSUs to fork out a one-time special hefty dividend, which incidentally would also benefit the public shareholders. A one-time special windfall tax would send the wrong signal that after viewing the consumers as sitting ducks (thanks to the inelastic nature of demand for fuel) the government is training its guns on oil producers at a time when they need all the encouragement to ramp up domestic production. ONGC has promised to embark upon a Rs 31000 crore capex program towards this end.

Spike in profits occasioned by seasonal or cyclical or geopolitical factors should not be viewed as a windfall. There are certain activities that have attracted this tag due to the leisurely, decadent, indolent, degenerate and hedonistic ambience, as it were, pervading them. To wit, our income tax law taxes winnings from lotteries, race horses, card games and TV contests like Kaun Banega Crorepati (KBC) at the flat maximum marginal rate of tax which is 30 percent. The latest to join this select hit list is profits from the virtual world including cryptocurrencies.

Fiscal purists aver that the government must not discriminate between one income and another. For it, in their worldview, income should be income, period. But then this dictum is often followed in breach with perks and a few allowances being taxed softly vis-à-vis basic salary and capital gains from bourses let-off with a slap on the wrist. So, in such a discriminatory milieu, taxing windfalls with a heavy hand is not wrong and par for the course.

The problem in pigeonholing an income as windfall is tricky and fraught at the producers’ level. While it would be absurd to call abnormal spike in cement profits on the back of turnaround in the fortunes of the construction industry as a windfall and hit it with a sledgehammer, the government perhaps may be justified in coming down heavily on the so-called vice industries like casinos, liquor and even sugar-excessive consumption, which is a health hazard. Some countries have preferred though to target the consumers of sugar-laced items like soft-drinks instead of their producers.

In any case, tax policies and rates should be certain and not whimsical. Windfall profits tax on producers would project the government in a bad light—as a whimsical opportunist. Already the Indian hydrocarbon exploration and exploitation has been acknowledged as difficult what with the nature of not being munificent on this score. That is why not much headway has been made on this front with foreign oil majors showing lukewarm interest knowing as they do that bulk of their investments could go down the drain as aborted ventures. While this is the inherent hazard of all exploration industries, the government should refrain from playing the spoilsport. If it can’t entice, at least let it not repel.

(S Murlidharan is a veteran columnist and tweets @smurlidharan)