Shares of ONGC and other upstream oil companies soared after the government reduced the windfall tax on domestically-produced crude oil and fuel exports. Oil producers and refiners expect the move to boost their profitability and enhance their competitiveness against imported crude.

What Happened? The Indian government has cut the windfall tax on domestically-produced crude oil to zero, effective from May 16. The government has also maintained a zero windfall tax on petrol, diesel, and aviation turbine fuel (ATF) exports. Initially implemented in July 2020, this tax aimed to levy the excessive profits that private refiners made during a period of low crude prices.

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Price Action: The decision saw shares of ONGC, the largest state-owned oil producer, extend its gains from the previous session by 1.3% to ₹167.80. Oil India, another state-run oil explorer, also gained for a second straight session to go up 2.2% to ₹264.95.

The Nifty Energy Index was up 0.2%, outperforming the Nifty 50, which had given up 0.2%.

More Competitive: This reduction in windfall tax is seen as a positive step for the oil sector, likely to improve cash flows and margins for oil companies. Further, it will enhance the competitiveness of domestic crude oil in comparison to imported alternatives, which are subject to a customs duty of 2.5%.

The windfall tax reduction comes at an opportune time, with global crude prices hovering around $75 per barrel, primarily driven by strong demand recovery and supply limitations. As India imports around 85% of its crude oil requirements, the nation is highly susceptible to price fluctuations in the international market.

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