Ambani meets PM, decries demands for windfall tax

[Naresh kumar]

With UPA government's new found ally Samajwadi Party gunning for
Reliance Industries, the company head Mukesh Ambani on Monday met
Prime Minister Manmohan Singh and a host of other senior government
functionaries to explain how demands for levy of windfall tax was bad
economics.

Ambani first met Singh and there were unsubstantiated reports that he
followed this with a meeting with Congress President and UPA
Chairperson Sonia Gandhi.

Flying in from Mumbai this morning, Mukesh started a series of meeting
with top bureaucrats, including a call to Cabinet Secretary K M
Chandrasekhar.

Ambani's visit assumes importance in the wake of Amar Singh raising a
number of issues, including a demand for withdrawal of EOU status for
RIL's Jamnagar refinery along with a suggestion that Prime Minister
should intervene to bring peace between Mukesh and younger brother
Anil.

According to anews agency Ambani pleaded that the demand for levy of
so-called windfall profit tax on private firms was no more than a
populist slogan based on the misleading logic that with rising prices
of oil across the globe, these companies are making profits far in
excess of what they legitimately deserve.

While Government shares production from oil and gas fields and is a
beneficiary of high oil prices, the refinery business is highly
cyclical and with new capacities coming on stream world over margins
will decline precipitously.

Ambani is believed to have told policy makers that fiscal revenue gain
from a WPT would be short-term in nature, but the economic costs of
introducing an unstable fiscal regime could be long lasting.
Ambani is believed to have told policy makers that during boom periods
of business cycles diverse sectors enjoy high returns like the IT boom
in the late 1990s, but a WPT was not even contemplated for them.

Presently, many domestic natural resource-extracting entities in non-
oil sectors have also benefited financially from the unprecedented
global commodity boom. Will it be justified to impose WPT on them, he
asked.

The US imposed a WPT in 1980 but repealed it in 1988 as it led to
increased dependence on imported oil and gross revenue gains were
significantly less than anticipated.

Ambani is believed to have stated that the current high crude oil
price has led to an unprecedented increase in supply and service costs
raising both exploration and development of oil and gas by a factor of
3 times over the last 3-4 years.

In economic terms, taxes such as WPT increase marginal production
costs, and profit maximising firms respond to it by reducing output
and raising prices.

Imposing WPT could have several adverse economic affects. If imposed
as an excise tax, the WPT would increase marginal production costs,
reduce domestic oil production and increase the level of oil imports.

Windfall profit tax is a tax on actual profit or profit margins. If
levied on actual profit then it would need to take into account the
capital invested, asset base and similar parameters while if levied on
profit margins it was necessary to look at margins of other businesses
especially during boom periods.
Refining business, Ambani is believed to have argued, is cyclical in
nature.

Product deficits catalyses expansion plans. But as new capacities come
on stream, refining margins decline precipitously. Also, refining
needs large and continuous investments just to meet stringent clean
fuel specifications and stay in business

[suguhopes]

N.Sukumar
Research Analyst