Windfall Tax

• The government ended the windfall tax on crude oil production within the country and exports of diesel, petrol, and aviation fuel (ATF). This tax was introduced 30 months ago when global fuel prices surged after Russia invaded Ukraine.

What is Windfall Tax?

• The “windfall tax” was introduced to tax the extraordinary profits earned by oil companies during unusual global market conditions.
• It is a higher tax on profits that result from a sudden windfall gain to a company.
• The term “windfall” refers to a dramatic and unanticipated increase in business profits.
• The main objective is to redistribute excess profits from the sudden windfalls to benefit the wider community. Hence it is levied mostly for a temporary period and removed once conditions normalise.
• In India, the windfall tax applied to fuel exports and domestic crude oil production under central excise laws.

Pros of Windfall Tax

• Promotes market stability by moderating excessive speculative activities.
• Cushioning price shocks by reducing money supply in the economy.

Cons of Windfall Tax

• Discourages investment.
• Risk of capital flight as companies might relocate to countries with more favourable tax regimes.
• Administrative complexity due to subjectivity over what constitutes ‘windfall.’

Windfall Tax on Crude Oil

• Windfall Tax on Crude Oil production was introduced 30 months ago when global fuel prices surged after Russia invaded Ukraine.
• Review Process: Tax rates were reviewed every two weeks based on international fuel prices and profit margins. In the first review, the tax on petrol exports was set to zero and stayed that way.
• Special Additional Excise Duty (SAED): Charged on domestic crude oil and exports of ATF.
• Combined SAED and Additional Excise Duty (AED): This is applied to diesel and petrol exports, and AED is also called the Road and Infrastructure Cess (RIC).

Why was it introduced?

• The main goal was to take a share of excess profits while ensuring enough fuel supply for domestic use.
• Surge in Global Oil Prices:  Global oil prices went up sharply, which caused a rise in domestic oil prices because Indian crude oil prices are linked to international rates.
• Lucrative Margins: High profits in international markets encouraged private refineries to export fuels.
• Global Context: India was not alone imposing a windfall gains tax. Many other countries introduced similar taxes to capture the super-normal profits of energy companies after Russia invaded Ukraine.

Reasons for Scrapping

• Opposition from Oil Industry: The Indian oil industry opposed the tax as it limited profitability and discouraged efforts to increase oil production.
• Unpredictable Taxation: Frequent reviews made the taxation regime unpredictable.
• Decline in Revenue: Revenue from the windfall gains tax declined due to the softening of international crude oil and fuel prices.
• Minimal Financial Impact: The removal is expected to have minimal impact on the financials of domestic oil producers like ONGC and Oil India and major fuel exporters like Reliance Industries and Nayara Energy.