People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 18

May 11, 2008



Impose Windfall Tax On Private Refineries

The following is the text of the letter written by MK Pandhe, Polit Bureau member of CPI(M) and CITU all India president on May 03, 2008

I DEEPLY appreciate the concern expressed in your address at CII Annual General Meeting on April 29, 2008 when you said:

But we cannot address the challenge of food security without also addressing the problem of rising prices of petroleum products. What is disturbing is the fact that while world oil demand rose by just 1 percent per annum over the past two years, crude oil prices shot up by over 90 percent in US dollar terms and over 40 percent in terms of Euros. This sharp rise in world oil prices has the effect of redistributing incomes away from oil importing developing countries to oil exporting countries.”

In the light of the above, I am constrained to invite your immediate attention to the super-profiteering in petroleum sector not only in oil exporting countries, but in India itself by private sector oil companies. The profits enjoyed by private oil companies in the country have increased disproportionately along with increase in oil prices as can be seen from their financial performance during last two – three years. The burden of high crude oil prices needs to be shared across to the petroleum sector as a whole, not just the public sector companies, as is being done today. Due to selective policy of the government, private sector companies both in upstream and downstream are enjoying windfall profits arising not due to extra business acumen or competitive business approach but due to fortuitous circumstances, created by the sharp rise in global crude oil price.

With crude oil prices now exceeding $ 100/bbl, it is necessary that windfall gains be recovered from private oil and gas producing companies like M/s Cairns, Reliance etc who are contractors extracting oil and gas in India through Production Sharing Contract (PSC). When these contractors participated in the famed NELP policy, none of them could have envisaged crude oil prices beyond $ 30/ bbl. It would be a failure on government’s part to allow such upstream contractors additional gain of $ 70/bbl - $ 80/ bbl in the name of import parity without any link with actual production cost. Many other countries have gone ahead and renegotiated their contracts or imposed windfall taxes on such profits or even taken over the oil fields so that these fortuitous gains are used for funding development in the society and not for furthering private interest.

Similarly, private sector refineries have been allowed to keep margins exceeding $ 15/bbl while public sector companies struggle to meet their financial requirements, in order to meet their social responsibilities to moderate the price of kerosene, diesel, petrol and LPG. The major private oil refinery of M/s Reliance in last quarter has posted an unusually high gross refinery margin of $ 16/barrel. As you are aware, a couple of years back this was between $ 6 to 8/barrel. You will agree that crude price hike can increase the product price but not the refining cost which should not be more than $ 2/barrel for a modern refinery. It is necessary that the government imposed windfall tax on private refineries, who are not sharing the subsidy along with the oil marketing companies in public sector. It is understood that the private refiners were providing a discount on sale of LPG and other products in 2006-07, but this has been reversed in 2007-08.

I therefore request you to impose windfall taxes on the super-profits earned by the private sector petroleum industry in India for revenue generation and simultaneously withdraw import duty on crude oil which will curb the present spurt of inflation without affecting “revenue neutral” tax philosophy of the finance minister.