India is considering an unexpected tax on oil and gas producers (government as well as private) to reduce public expenditure on fuel, food and fertilizer subsidies amid skyrocketing inflation. Hindustan Times Reported on Friday.
Earlier this week, Britain announced an unexpected tax on oil and gas producers that will last two years and is expected to net £5 billion. The idea is to generate funding for a government-proposed 15 billion pounds of relief for civilians affected by gas shortages and additional high energy prices due to the war in Ukraine. India should also give away some of the unearned income generated by hydrocarbon companies – the tax should be levied on revenue rather than profit, and pegged at something like 20%.
Conceptually, the unexpected is easy to understand, but empirically, it is not easy to recognize. Britain’s major oil giant BP is a major beneficiary of a jump in oil and gas prices in the wake of the war in Ukraine but reported losses in its latest quarterly numbers due to the divestment of its Russian operations at uneconomical prices. To be on the right side of Western sanctions.
Windfall is a profit margin that accrues to a company for reasons unrelated to any effort by the company. Take a company like Saudi Aramco, which has some of the lowest oil extraction costs in the world. Let’s say it’s $15 a barrel – it really can be lower or higher, doesn’t matter – and when oil prices move within a range the company makes a particular level of profit from its operations. When the price rises by more than $100 a barrel as a result of the war, its revenue increases. There is no reason for its cost to increase simultaneously, and hence its profits also increase. Why should a company have exclusive rights to the excellent profits inevitably generated by the Russian occupation of Ukraine, forcing consumers around the world to pay high prices for the oil they buy? Therefore, the case for taxing windfall gains is quite strong.
However, the identity windfall profit Can be a challenge, and for reasons unrelated to the ability of high-earning accountants to model a company’s profits in size-zero attire. It is important to distinguish windfall from cyclical fluctuations. Take up a refining business. When petroleum product prices are rising steadily, a refinery will sell its refined products at a price significantly higher than the price linked to the crude oil price when it acquired that inventory. What goes up, then also goes down. As the cycle turns, the company will be forced to sell the refined product at a price lower than those associated with the price of crude oil at the time it acquired that inventory. The loss on the upswing will be compensated by the loss on the downswing. Without allowing loss on the downswing, it would not be appropriate to calculate profit as a valid target of an unexpected tax.
Therefore, care should be taken to identify who is taxed. Statistical evidence should be used to identify the upper limit of cyclical fluctuations in prices. Only the price above that should be considered as generating windfall.
Then again, profit is a matter of opinion. If the company chooses to book higher depreciation in a year of potentially higher profits, it could see those surplus profits disappear. The company may pay off the debt in full to reduce reported profits. It is safer to target revenue rather than profits to tax windfall gains.
Upstream hydrocarbon companies and refineries are legitimate targets of windfall profits. So are coal miners. Instead of taxing steel exports, it would make more sense for the government to export steel without any restrictions, allow steel manufacturers to take advantage of higher international prices and benefit from the consequent increase in taxable profits, even if these are not unexpected. be. the gain.
In India, refiners are likely to come up with under-recoveries in their retail sales, thanks to state-owned oil marketing companies keeping prices down, ahead of the impending assembly elections, even as crude Taxes as an argument against windfall, as oil prices rise sharply. If companies are impacting retail sales, why punish them further with an unexpected tax?
Refiners do not sell their entire produce at a loss in the domestic market. Some of them are major exporters of petroleum products. These bring global prices that are unnaturally high, thanks to the Ukraine war.
The government needs revenue – not only for the normal business of governance but also to meet the additional expenditure on the country from the global increase in defense spending. As countries like Germany start spending 2% on defense and NATO becomes more powerful than before, countries like Russia and China will feel compelled to increase their defense spending, so that the status quo on offensive and defensive capability be able to maintain Since China spends more on defence, it would be appropriate for India to spend more on defence. Windfall tax will come in handy.