Context:
- The central government late 20th March, 2023 slashed the windfall tax on domestic crude oil to Rs 3,500 per tonne from Rs 4,400 per tonne. Meanwhile, the government increased the export duty on diesel to Re 1 per litre from Rs 0.50. The revised rates come into effect from March 21, Tuesday.
- The Centre has scrapped export duty on petrol and diesel. The government revised the windfall tax for the second time in March 2023.
- Earlier the government on March 4 slashed the export duty on diesel to Rs 0.50 per litre, and that of locally produced crude oil to Rs 4,000 per tonne.
Windfall Tax
- The windfall tax was first levied on July 1 last year after oil prices jumped due to the ongoing Russia-Ukraine war. The government had mandated that companies sell the equivalent of 50% of their gasoline exports and 30% of their diesel exports domestically in the current fiscal year to March 31.
- A windfall tax is a higher tax rate levied by governments against certain industries to experience above-average profits.
- So 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.
- Crude oil prices have skyrocketed following the Russia-Ukraine war. 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.
- Moreover, the government’s spending has gone up after it had cut Central Excise Duty and spent more on food and fertilisers.
- It 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.
