Govt may levy windfall profit tax on domestic natural gas

This is one of the various proposals being considered to mobilise additional resources with the government’s fertiliser subsidy alone expected to surge above ₹2.5 lakh crore in FY23, an over 138% jump from the Budget Estimate (BE), they added, requesting anonymity.

The Union government may bring domestic natural gas, a key input in fertiliser production, under the ambit of windfall profit tax , making its treatment of the commodity consistent with the way it deals with indigenously produced crude oil and exports of fuel, as it explores various options to meet rising fuel, food and fertiliser subsidy bills, two people aware of the development said.

Govt may levy windfall profit tax on domestic natural gas

This is one of the various proposals being considered to mobilise additional resources with the government’s fertiliser subsidy alone expected to surge above ₹2.5 lakh crore in FY23, an over 138% jump from the Budget Estimate (BE), they added, requesting anonymity.

The two people said its possible that, if accepted, the proposal could have a retrospective effect.

Union finance minister Nirmala Sitharaman, who is in the US, said in a conversation with economist Eswar Prasad on Tuesday that disruptions in global fuel supplies have impacted fertiliser prices, one of the key inputs for millions of poor Indian farmers. “There are things happening outside, which are definitely hitting us…, Fertiliser, it is at a great risk. Last year, we had to give 10x [ten times more] the price on [its] imports, and obviously Indian farmers are still not really large farmers [who can afford it],” she said.

The government also extended its enhanced free grain scheme for another three months up to December 31 with additional financial implication of ₹44,762 crore, which is over and above ₹80,000 crore already spent so far in 2022-23, the two added.

“The government is committed to shielding farmers and underprivileged section of society from price rise, which is mainly due to factors beyond its control, such as supply chain disruptions because of the Ukraine war and global oil producers’ move to keep fuel rates artificially high. In such circumstances, sectors having windfall gains must contribute a part of their windfall profit for the common good,” one of the two said.

From July 1, the government imposed a windfall profit tax on domestically produced crude oil and exports of petrol, diesel and aviation turbine fuel (ATF). It adjusts these levies every fortnight based on their respective price volatility. So far, it has spared natural gas from the ambit of windfall profit tax.

Prices of domestically produced gas, which are linked with international benchmarks, have also surged significantly because of supply concerns due to the Ukraine war and western sanctions against Russia, a second official said. “As this surge in profit is purely windfall, without any additional costs to producers, they must share a part of it with government in shielding the poor from rising fuel and fertiliser prices,” he said.

India has two types of natural gas pricing regimes – one for gas produced from difficult terrain or deepwater fields, and the other from blocks located elsewhere. In the six months to September 30, prices of the first type have risen 26%, and prices of the second 41%. The current prices of the two are $12.46 per unit and $8.57 per unit.

The ministries of finance, petroleum, fertiliser and gas producers and distributors Oil and Natural Gas Corporation (ONGC), Oil India Ltd (OIL), GAIL India Ltd, Vedanta group, and Reliance Industries Ltd (RIL) did not respond to e-mail queries on this matter.

Two industry experts working for gas producers said on condition of anonymity that the idea to impose windfall tax on domestic gas is not justified as gas prices are fixed by a government-approved formula. “Besides, price of gas produced from the deepwater blocks are little more than $12 [per unit], which is significantly below the international gas prices hovering around $40. As producers are denied market price, there is no reason to impose windfall tax,” one of them said.

“In case of domestic crude oil, producers get about $80 per barrel after paying the windfall tax. But in the case of natural gas, the current price is equivalent to only $70 a barrel, hence no scope for windfall,” he said.

A second expert said there is no correlation between fertiliser subsidy and domestically produced natural gas as imported LNG is mostly used in fertiliser plants. The fertiliser sector requires about 45 million metric standard cubic metres per day (mmscmd) gas. While 15-18 mmscmd are met through long-term LNG contracts, about 15 mmscmd gas is supplied by state-run domestic producers such as ONGC and balance is purchased in the spot market.

SC Sharma, an energy expert and former officer on special duty at the erstwhile Planning Commission, said: “The government has constituted the Kirit Parikh committee on gas pricing and no decision [on windfall profit tax] is possible till such time the committee recommendations are available.”

He added: “Unlike oil, natural gas prices in India are not market determined and are arrived at based on a formula which does not reflect a true status as India being a highly energy import dependent nation. The Windfall tax is not a correct measure as the majority of gas is either produced under PSC [production sharing contract] regime plus imported LNG. Also, companies have failed to create long term LNG Contracts during 2019-2021 when LNG prices were low.”.

Parikh suggested that the fertiliser sector should also improve energy efficiencies and also enhance domestic production of urea. “If the government offers 10% of fertiliser subsidy for promoting biofertilisers, it can make a large difference,” he said.

“Gas pricing is not the major issue, but not increasing fertiliser prices for over 20 plus years is a major issue for subsidies. Government has to do a fine balancing, and fertiliser being strategic sector some [gas] allocations to power sector could also be diverted from the power to the fertiliser sector.”