A Slew of Edible Oil Prices Post Cabinet Meeting

Merely a month after the Ministry of Consumer Affairs, Food & Public Distribution posited that the wholesale price of Edible Oils in India has decreased, the Government has urged manufacturers to slash prices again.

Market Temperament

In April, Indonesia, the world’s biggest exporter of palm oil, halted shipments, to restrain the hiking prices of edible oils. This ban was introduced when the global market was already struggling to import oil from the war in Ukraine. Considering that India is the largest importer of cooking oil from Southeast Asian countries, it experienced the highest impact of the Indonesian ban. However, on the inducement of Indonesian lawmakers, the ban was lifted after three weeks.

Due to the lifting of the ban on palm oil export, cooking or edible oil prices in the Indian market are set to decrease. Indian manufacturers use palm oil in a multitude of household products such as soaps, cosmetics, processed foods and biofuel. Therefore, the immobility caused by market circumstances had led to myriad issues for manufacturers and customers.

Windfall Taxation

The invasion of Ukraine by Russia has caused crude oil prices to reach new highs, and there has been talks in the markets about imposing a one-time "windfall tax" on oil and gas businesses due to the unprecedented profits witnessed by market players in the energy sector. In order to deal with the windfall profits earned by companies the government had two options: either raise dividend yield or impose a windfall tax. with no surprize the government  chose the second option, which helped them to limit the fiscal deficit.

On July 1, the government enacted windfall gain taxes on domestic crude oil production as well as the export of petrol, diesel, and aviation turbine fuel (ATF)[1]. Additionally, it requires exporters to first satisfy the needs of the domestic market before supplying the export demand. According to a report[2], if the windfall taxes were applied to crude output alone, they would bring in an estimated Rs 65,600 crore in income, while the taxes on export goods would bring in an additional Rs 52,700 crore. Therefore, the money collected through windfall taxes can be used by the government to offset its losses.

Post windfall tax, the reported margin on gasoline and diesel has decreased to almost loss-making levels, while the reported margin on crude and aviation fuel has fallen below 15-year averages. In the last few weeks, there has been a reasonably large decline in crude prices as well as margins for important refined products due to growing concerns about oil consumption as recession fears intensify.

Will Prices Shoot due to this?

The irony of this well-meaning tax rate revision made by the GST Council is the manufacturer’s inability to attain a refund of the ITC which will eventually lead to a price hike. In relation to edible oils, the ITC on account of inputs is higher than the amount of GST charged on account of outward supplies of the goods. Therefore, the inability to attain the refund of the higher GST amount paid would trigger liquidity blockages and additional monetary burden on manufacturers.

International Take

Besides India, other nations are also experiencing the levy of windfall taxes. Recently, Hungary announced its intent to levy windfall taxes on additional profits earned by various sectors, including energy firms, for a two-year period to fund subsidies.[3] UK and Spain are also resorting to implication of windfall taxes to minimise food and fuel bills of their citizens[4]. With the rising global demand for edible oil and alternatives like palm oil, Indonesians, predicting a domestic shortage on account of the enhanced profit-making potential the international market, froze palm oil exports thereby further shooting the international demand and cost.

Following a drop in international rates and with Indonesia removing its export levy on all palm oil products until August 31, edible oil manufacturers in India will be able to pass on the benefits of softer global prices to final customers. The government reduced the windfall tax on gasoline, diesel, jet fuel, and crude oil. The additional tax of Rs 23,250 per tonne on domestically produced crude oil has been reduced to Rs 17,000 per tonne.[5]

Significant Takeaways

In India, at the first instance, the domestic oil and gas producers have seen a sharp rise in profits. The strain on people's wallets is growing along with the price of crude oil. However, oil and gas businesses all over the world are making money while government exchequers are bleeding and these advances are the result of the geopolitical environment rather than any changes in their operations. A final decision on this matter would, however, be taken by the competent authority at an appropriate time.

Disclaimer: The content of this piece published by White & Brief Advocates & Solicitors is intended for informational purposes exclusively and is not intended to be a piece of legal advice on any subject matter. By viewing and reading the information, the reader understands there is no attorney-client relationship between the reader and the publisher. The contents of this informational piece shall not be used as a substitute for professional legal advice from a licensed attorney, and readers are encouraged to consult legal counsel on any specific legal questions they may have concerning a specific situation.

[1]India cuts windfall taxes on fuel exports as global prices fall’, The Economic Times. Available here.

[2] ‘Govt slashes windfall tax on fuel export, domestic crude oil’, Press Trust of India. Available here.

[3] ‘Govt considers windfall tax on oil and gas giants’, Hindustan Times. Available here.

[4] Ibid.

[5] Govt cuts windfall tax on fuel export, raises levy on domestic crude oil, Business Standard, Available here.

Dated: September 26, 2022

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