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With the United Progressive Alliance government's new found ally Samajwadi Party gunning for Reliance Industries [Get Quote], 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.
Mukesh Ambani is also scheduled to meet Congress president Sonia Gandhi at 7.00 p.m. on Monday. Before that he will meet with the prime minsiter's principal secretary TKA Nair at 4.00 p.m., and Petroleum Minister Mulri Deora at 5.00 p.m.
Flying in from Mumbai on Monday 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 SP leader Amar Singh raising a number of issues, including a demand for withdrawal of EOU (export oriented unit) status for RIL's Jamnagar refinery along with a suggestion that Prime Minister should intervene to bring peace between Mukesh and younger brother Anil.
Sources said 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 the 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 (windfall profits tax) 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The US imposed a WPT in 1980 but repealed it in 1988 as it led to increased dependence on imported oil and gross revenue gains were significantly less than anticipated.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.
Mukesh Ambani's RIL and Anil Ambani's RCom have been involved in a tussle over the South African cellphone major MTN.
Slide show: 3 years after the split, Ambanis at war again!
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