August8 , 2022

Centre pares windfall tax on crude, scraps petrol exports levy

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With global oil prices ebbing, the Centre on Wednesday slashed the windfall tax levied on crude petroleum producers, reduced the export tax on Aviation Turbine Fuel (ATF) and diesel and scrapped the duty on petrol exports.

On July 1, the government had levied fresh taxes on the export of petrol, fuel and ATF as well as the domestic sale of crude oil in view of runaway global prices, with a plan to review the taxation levels every fortnight. 

In the first such review, notified on Wednesday, the cess of ₹23,250 per tonne on petroleum crude has been lowered to ₹17,000 per tonne. This cess was aimed at reining in windfall profits for domestic oil producers who sell their output at international parity prices even to domestic refineries. 

No impact on domestic prices

The Finance Ministry had emphasised that this cess would not apply on imported crude or impact domestic fuel prices. 

Similarly, the levies on export of ATF and diesel were both cut by ₹2 per litre, to ₹4 per litre and ₹13 per litre, respectively, while the levy of ₹6 per litre on the export of petrol was completely scrapped.

Also, exports of these fuels from units located in Special Economic Zones, or SEZs, have now been exempted from duties, undoing the July 1 decision, which had made cesses applicable to any export of diesel and petrol from the country. 

Fiscal impact

The duty tweaks, including the 27% cut in cess on domestic crude oil, would lead to a reduction in the fiscal windfall from these taxes from about 0.37% of GDP, to about 0.2% of GDP for this year, Nomura economists wrote in a note, adding that fiscal risks remained elevated for India.

“At the margin, the reduction in export duties on fuel should be positive for export growth, although we await merchandise trade data for July-August to assess whether there was a material deterioration in oil exports due to the imposition of taxes,” Nomura economists Sonal Varma and Aurodeep Nandi wrote, adding that concerns about the current account deficit (CAD) persist.

“We forecast a widening of the current account deficit to 3.3% of GDP, from 1.2% in FY22. While FDI flows are likely to remain stable, they are unlikely to fully offset the weakness in FII flows, which should lead to a negative basic balance of payments (current account plus net FDI),” they concluded.

The levies on exports of fuel products were imposed with an eye on ensuring that the domestic availability of fuels was not adversely affected as a consequence of producers looking to tap more lucrative global markets. 

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