Windfall tax on oilcos’ exports may not fix policy distortions
The recent, select demands to levy windfall taxes on private-sector petroleum companies do call for a proper policy debate. It’s a current issue in public finance, no doubt driven by the recent flare-up in oil prices.
By ET Bureau |
NEW DELHI: The recent, select demands to levy windfall taxes on private-sector petroleum companies do call for a proper policy debate. It���s a current issue in public finance, no doubt driven by the recent flare-up in oil prices.
Also, the economic rationale for windfall taxes ��� only in certain circumstances, of course ��� can indeed be justified. But the gameplan to impose windfall taxes on exports of private oil refiners would not really end the panoply of distortions in oil policy.
In parallel, there may be a sound case for more progressivity in taxes and levies on upstream producers, especially in scenarios when crude oil prices, already elevated, almost double in just about a year or so. In such situations, the case for windfall tax ��� due to a spurt in real value quite unforeseen by producers and not in any degree due to efforts made, intelligence exercised, risks borne, or capital invested by them ��� may well exit.
However, what���s needed is well-thoughtthrough policy that does not needlessly divert investment funds away from the high-risk and capital intensive exploration and production segment. Note that the last major oil find in Indian fields was over three decades ago, and the fact remains that large stretches of our sedimentary basins remain essentially unexplored. The international experience when in comes to windfall taxes in the oil sector is quite discouraging.
The US did experiment with such a tax with the Crude Oil Windfall Profit Tax Act of 1980. It was Carter���s big idea. However, according to a 1990 Congressional research study, the tax depressed resource allocation in the US oil industry, increased oil imports and raised only a ���tiny fraction��� of the revenue envisaged. The study, in fact, found that the tax constrained US oil output by 3% to 6% and disproportionately hiked imports.
The point is that a windfall oil tax can thoroughly dampen investor confidence, considerably reduce funds for reinvestment and ploughback, and quite needlessly stultify markets, enterprise and growth. It would also be perverse incentive for creative accounting and misdeclaring profits.
Also, the economic rationale for windfall taxes ��� only in certain circumstances, of course ��� can indeed be justified. But the gameplan to impose windfall taxes on exports of private oil refiners would not really end the panoply of distortions in oil policy.
In parallel, there may be a sound case for more progressivity in taxes and levies on upstream producers, especially in scenarios when crude oil prices, already elevated, almost double in just about a year or so. In such situations, the case for windfall tax ��� due to a spurt in real value quite unforeseen by producers and not in any degree due to efforts made, intelligence exercised, risks borne, or capital invested by them ��� may well exit.
However, what���s needed is well-thoughtthrough policy that does not needlessly divert investment funds away from the high-risk and capital intensive exploration and production segment. Note that the last major oil find in Indian fields was over three decades ago, and the fact remains that large stretches of our sedimentary basins remain essentially unexplored. The international experience when in comes to windfall taxes in the oil sector is quite discouraging.
The US did experiment with such a tax with the Crude Oil Windfall Profit Tax Act of 1980. It was Carter���s big idea. However, according to a 1990 Congressional research study, the tax depressed resource allocation in the US oil industry, increased oil imports and raised only a ���tiny fraction��� of the revenue envisaged. The study, in fact, found that the tax constrained US oil output by 3% to 6% and disproportionately hiked imports.
The point is that a windfall oil tax can thoroughly dampen investor confidence, considerably reduce funds for reinvestment and ploughback, and quite needlessly stultify markets, enterprise and growth. It would also be perverse incentive for creative accounting and misdeclaring profits.
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There have been other instances of windfall taxes abroad. The Blair government in the UK did impose a one-off tax in 1997, on the profits of a number of privatised utilities companies. The reasoning being that the corporates were privatised and sold on the cheap. Then, the profits were estimated as the difference between a company���s privatised sale price and its average value over the subsequent four years. In recent years, the UK has also raised taxes on newer oil wells, which were significantly reduced earlier.
But the policy generally is to desist from levying windfall tax on the profits of oil majors. There are sound economic rationale to avoid such tax design. For one, a disproportionate share of internal resources in oil tend to be reemployed as investment. Also, attractive bottom lines in the oil sector also mean high taxes in absolute terms, and on a continuing basis too. Furthermore, the world over, taxes on oil usage do tend to rise with higher retail prices of petro-products.
Besides, generally accepted economic and accounting principles suggest that producers of depletable resources (such as oil), who attempt to optimise profits given access to a finite stock of resources, should be taxed in the same manner as non-energy producers not subject to such finite-resource constraints. In any case, the depletion of hydrocarbon resources ought to lead to higher real energy prices, and consequently higher attendant taxes and levies.
In recent years, exports of petroleum products have of course increased massively. It may be due to explicit corporate strategy. But it���s also policy-induced. The largely sticky retail prices of key petro-goods like petrol and diesel and languid non-revision by governmental fiat ��� never mind shoring prices of crude ��� have made it uneconomic for refiners like Reliance to go ahead with domestic sales.
Instead, public sector oil marketers have had to make to with runaway under-recoveries, with state-owned oil producers pitching in with discounts. Over and above, oil bonds to be issued by the Centre would supposedly make good the losses of the oilcos. We do need transparency in our oil policy.
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What���s required is opening up and reform of oil marketing and not its continuing ring-fencing, complete with monopoly pricing. In tandem, what���s called for is a clear-cut policy for graded increase in royalty, cess and other oil field levies when international oil prices shoot up. We ought not to be taxing exports of petro-goods; it is not done for other goods. Of course, the policy push ought to be such that we step up labour-intensive exports rather than rely on exports of hugely capital intensive oil products, with relatively low value-addition. A windfall tax on refining would hardly make the structural change.Download
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