India Cuts Windfall Tax Amid Sluggish Oil Prices and Chinese Slowdown

Price

• Crude oil futures, which traded lower on Saturday morning, are still on track for weekly gains as recent economic data from the US has ignited hopes of an interest rate cut in September.
• At 9:53 am on Saturday, October Brent oil futures were at $80.77, down by 0.33 percent, and September crude oil futures on WTI (West Texas Intermediate) were at $77.81, down by 0.45 percent.
• August crude oil futures were trading at ₹6537 on the Multi Commodity Exchange (MCX) during the initial hour of trading on Saturday against the previous close of ₹6487, up by 0.77 percent, and September futures were trading at ₹6447 against the previous close of ₹6401, up by 0.72 percent.

Demand and Supply

• There is a decrease of about 10-15 percent in the production of crude oil by Cairn-Vedanta in Barmer-Balotra. This reduction is not only negatively impacting state revenue, but it may also lead to a higher requirement for oil imports once the refinery starts operation.
• Construction of the refinery in Pachpadara, District Balotra, began on January 16, 2018. By June 2024, Rs 47,324 crore will have been spent on the project, with 80% of the work completed.
• Experts believe the refinery will be completed by next year. The Pachpadra refinery will have a 9 million metric tonnes per annum capacity, with 1.5 million metric tonnes sourced from Cairn-Vedanta and 7.5 million metric tonnes imported.
• The government has slashed the windfall tax on domestically produced crude oil to Rs 2,100 per tonne, from Rs 4,600 per tonne with effect from Saturday.
• The tax is levied in the form of Special Additional Excise Duty (SAED).
• The SAED on the export of diesel, petrol, and jet fuel or ATF has been retained at 'nil'.
• The new rates are effective from August 17, an official notification said.
• India first imposed windfall profit taxes on July 1, 2022, joining a host of nations that tax supernormal profits of energy companies.

News

• India reduces windfall tax on petroleum crude to Rs 2,100 per metric ton amid declining oil prices and a slowdown in China's economy. The tax remains zero for diesel, petrol, and aviation turbine fuel.
• In a move reflecting global market dynamics, India announced a reduction in the windfall tax on petroleum crude to Rs 2,100 per metric ton, down from Rs 4,600 per ton. The revised tax rate becomes effective starting Saturday, August 17, 2024, as per an official gazette notification.
• This tax adjustment comes in the wake of a roughly two percent dip in oil prices, with Brent crude futures closing at USD 78.37 per barrel in international markets. The downturn is largely attributed to the slowing Chinese economy, which has faced significant challenges, including the sharpest drop in new home prices in nine years over July.
• Global traders are increasingly concerned about dwindling demand from major oil importers.
• The Organization of the Petroleum Exporting Countries (OPEC) recently lowered its global crude oil demand forecast for 2024 to approximately 135,000 barrels per day, citing weaker consumption from China.
• Meanwhile, the windfall tax on diesel, petrol, and aviation turbine fuel will stay at zero, with the tax reviewed biweekly.

Expert’s Opinion

• It is expected that the windfall tax on crude oil producers and fuel exports, initially imposed by India in July 2022 to address the issue of private refiners prioritizing overseas sales, will continue to influence market dynamics.
• Crude oil futures are expected to end the week with minimal changes as ongoing concerns about the demand outlook in China and easing geopolitical risks are anticipated to offset economic data reflecting slower inflation and strong retail sales, which indicate resilient consumer spending.