Oil and gas company stocks sank in the deep red zone in the afternoon trades on Friday, May 27, with companies like ONGC down 9 per cent and BPCL 5 per cent. This came on the heels of reports stating that the Indian government is considering a so-called windfall tax on oil and gas producers (state-owned as well as private) to offset ballooning public expenditure on fuel, food, and fertiliser subsidies amid skyrocketing inflation.
The tax, which may be levied when oil prices, for instance, cross a certain level, will boost the government’s finances, and help fund efforts to protect vulnerable sections from rampant inflation, an HT report quoting sources.
Windfall tax is, simply, a tax levied on companies whose financials have been boosted purely by luck, or events for which they are not responsible. For instance, energy companies have benefitted from the global spike in energy prices on account of Russia’s invasion of Ukraine.
Oil Windfall Tax- Why Are Indian Investors Spooked?
The UK government on Thursday, May 26, has announced a 25 per cent windfall tax on profits of oil and gas companies with crude surging over 50 per cent in 2022 so far.
Divam Sharma, founder at Green Portfolio, said: “UK has implemented 25 per cent energy windfall tax on oil and gas producers and has simultaneously announced a package to support households who are struggling to pay energy bills. There is an increasing pressure on the Governments worldwide to reduce inflation. With UK implementing this tax, there are fears that the GOI will follow suit. This fear has triggered a correction in such oil and gas producer’s stocks.”
There is speculation in the Indian market that similar steps can be taken back home too as it’s looking at additional revenue mobilisation measures to offset revenue loss due to recent excise duty cuts, higher fertiliser subsidies etc.
Furthermore, these reports seem to have spooked investors and it’s being reflected in the stock movement of all the oil and gas majors like ONGC, BPCL, Oil India, Reliance, and Vedanta.
Besides the UK, Italy, Hungary and Spain have also moved to impose some kind of windfall tax on companies. Hungary said it would tax windfall on additional profits earned by various sectors, including oil and gas companies for a period of two years, to fund subsidies. While Italy announced a one-time 25 per cent levy on energy companies to subsidise energy costs for consumers and businesses.
ONGC Shares Slump
Shares of Oil and Natural Gas Corporation (ONGC) hit a four-month low of Rs 142.35, down 6 per cent on the BSE in Friday’s trade after the company said it will invest Rs 31,000 crore over the next three years in exploring the Indian sedimentary basin for fuel reserves and on reports of a windfall tax to be put in place by the government.
“The company has drawn up a comprehensive roadmap to further intensify its exploration campaign, allocating a capital expenditure of about Rs 31,000 crore in the next three fiscal years during FY22-25. This is 150 per cent of its exploration expenditure of Rs 20,670 crore in the last three fiscals during FY19-22. ONGC also plans to leverage international collaborations with reputed global majors for this, for which talks are in an advanced stage,” it said in a press release.
This exploration intensification includes activities funded through ONGC’s internal program as well as funded and facilitated by the government, the company said.
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