Centre cuts windfall tax on oil companies amid falling prices
The Indian government has slashed the windfall taxes imposed on domestic crude oil exports, diesel, and Aviation Turbine Fuel (ATF). The cuts that become effective from December 16 bring the windfall tax on crude oil down to Rs. 1,700 per ton from Rs. 4,900 per ton. The government has been constantly revising the taxes, which were first imposed on July 1.
Why does this story matter?
- The crude oil market has been going through an uncertain phase recently. The sanctions and price cap on Russian oil, coupled with concerns about COVID-19 restrictions affecting China's oil demand have left the global crude industry in a tough spot.
- Prices have been falling consistently since November. Therefore, it makes little to no sense for the government to still levy windfall taxes on companies.
What is windfall tax?
A government imposes windfall tax on certain industries when the latter makes sudden, unexpected above-average profits due to economic conditions. Therefore, when an industry, the oil and gas in India's case, benefits from an event or a one-off external event that they are not responsible for and makes unexpected profits, the government taxes these profits separately.
Windfall tax on crude oil is now Rs. 1,700/ton
In the fortnightly revision of the windfall profit tax, the Centre slashed the tax on crude oil to Rs. 1,700 from Rs. 4,900. Per the Ministry of Finance notification, the government reduced the tax on ATF to Rs. 1.5 per liter from Rs. 5 per liter. The windfall tax on high-speed diesel is now Rs. 5 per liter, down from Rs. 8 per liter.
Why did the Indian government impose windfall profit tax?
The Centre imposed a windfall tax on the oil and gas industry after Indian companies made above-average profits due to the rise in international oil prices. This was a result of the Ukraine-Russia war. It is calculated by taking away any profits the companies are getting above a threshold. When it was first imposed, the tax on crude oil was Rs. 23,250 per ton.