Windfall gains tax on oil production, diesel-petrol export removed
Dec. 5, 2024

Why in news?

Recently, the government officially withdrew the windfall gains tax on domestic crude oil production and fuel exports (diesel, petrol, and ATF).

The levy, introduced 30 months ago during a surge in international crude oil and fuel prices following Russia's invasion of Ukraine, aimed to address global energy turmoil and ensure domestic fuel availability.

What’s in today’s article?

  • Windfall gains tax
  • Withdrawal of windfall gains tax

Windfall tax

  • About
    • Windfall taxes are designed to tax the profits a company derives from an external, sometimes unprecedented event— for instance, the energy price-rise as a result of the Russia-Ukraine conflict.
    • The United States Congressional Research Service defines a windfall as an unearned, unanticipated gain in income through no additional effort or expense.
    • These are profits that cannot be attributed to something the firm actively did, like an investment strategy or an expansion of business.
    • Governments typically levy a one-off tax retrospectively over and above the normal rates of tax on such profits, called windfall tax.
  • Rationale behind levying this tax
    • Redistribution of unexpected gains when high prices benefit producers at the expense of consumers,
    • To fund social welfare schemes, and
    • As a supplementary revenue stream for the government,
    • As a way for the Centre to narrow the country’s widened trade deficit.
  • Criticism
    • Brings uncertainty in the market
      • Since windfall taxes are imposed retrospectively and are often influenced by unexpected events, they can brew uncertainty in the market about future taxes.
      • This may affect the future investment in the related sectors.
    • Populist in nature
      • Many analysts believe that such taxes are populist and politically opportune in the short term.
      • The IMF advice note also said that taxes in response to price surges may suffer from design problems—given their expedited and political nature.
    • Profits earned in such instances are reward for the risk taken
      • Companies argue that it is the profit they earned as a reward for the industry’s risk-taking to provide the end user with the petroleum product.
    • Who should be taxed is another issue
      • Another issue is who should be taxed- only the big companies responsible for the bulk of high-priced sales or smaller companies as well.
      • This raises the question of whether producers with revenues or profits below a certain threshold should be exempt.

Withdrawal of windfall gains tax

  • Background - Introduction of Windfall Gains Tax
    • It was introduced on July 1, 2022, amid a surge in crude oil and fuel prices caused by Russia’s invasion of Ukraine.
    • It was aimed to address concerns about fuel availability in the domestic market during the global energy turmoil.
    • Apprehensions about the availability of the fuels in the domestic market amid the global energy turmoil at the time also contributed to the decision to impose the levy.
  • Windfall gains tax removed
    • On December 2, 2024, the govt withdrew the windfall gains tax on domestic production of crude oil and export of diesel, petrol, and aviation turbine fuel (ATF).
    • Decision reflects current global oil market stability and diminished likelihood of another supply shock.
  • Reasons for Withdrawal
    • Global Stabilisation:
      • Oil and fuel prices significantly reduced (from over $100 to under $75 per barrel).
      • Supply flows stabilised after initial shocks.
    • Domestic Market Conditions:
      • Robust fuel availability in the domestic market.
      • Declining revenue from the tax due to market adjustments.
  • Scrapping the levy: Impact and signal
    • Opposition to the Windfall Tax
      • The oil industry opposed the tax, citing reduced profitability for publicly listed companies and a discouraging environment for increasing oil production.
      • Frequent changes in levies created unpredictability in taxation, deterring investments in a country heavily reliant on oil imports (85% dependency).
    • Decline in Revenue Collection
      • Significant softening of international crude oil and fuel prices had reduced windfall gains tax revenues:
        • FY23: Rs 25,000 crore.
        • FY24: Rs 13,000 crore.
        • FY25 (so far): Rs 6,000 crore.
    • Impact on Key Stakeholders
      • No significant financial impact on domestic producers (ONGC, OIL) or major exporters (Reliance Industries, Nayara Energy).
      • Signals confidence in market stability and reduced risks of price surges or supply shocks.

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