Context: The Union government scrapped a 30-month old windfall tax on domestically produced crude oil and export of jet fuel (ATF), diesel and petrol following a decline in international oil prices.
Relevance of the topic: Prelims- Key facts about Windfall Tax.
What is the Windfall Tax?
- A windfall tax is a higher tax levied by the government on specific industries when the industry experiences unexpected and above-average profits.
- India first imposed the windfall tax on July 1, 2022, when crude oil prices were well over $100 per barrel, following the Russia-Ukraine war.
- When an industry (in this case oil and gas sector) benefits from a one-off external situation and makes sudden profits, these profits are separately taxed, which are over and above the normal taxes.
- Country’s upstream oil companies (ONGC, Oil India, GAIL) as well as private refiners Reliance Industries and Nayara Energy, who are the key buyers of discounted Russian supplies, were reaping major profits by aggressively boosting fuel exports instead of domestic sales.
Economic rationale for imposing windfall taxes:
- India’s trade deficit had increased to record high levels and a weak rupee had increased the value of India’s imports.
- Government spending has gone up after it had cut Central Excise Duty and spent more on food and fertilisers.
- The government then decided to levy windfall tax on oil companies to make up for this gap as the windfall tax adds to the government's earnings.
Economic rationale for removing windfall tax:
- Falling oil prices; Global crude oil prices have been falling since June 2022, and are currently under $75 per barrel. This has led to a decline in profits for domestic oil producers.
- Relief to oil companies: The removal of the tax is expected to benefit major oil producers like Reliance Industries and ONGC by lifting their refining margins.
- Relief to consumers: The removal of the tax could lead to lower airfares for airlines, and lower prices for petrol, diesel, and ATF for oil companies.
- Reduced government revenue: The windfall tax was not generating significant revenue, with collections dropping from ₹25,000 crore in FY23 to ₹6,000 crore in FY25.
