With global oil prices falling, the government on Thursday cut windfall tax on locally produced crude oil and diesel exports. In a notification, the finance ministry said the windfall tax on locally produced crude oil has been cut to Rs 1,700 per tonne from Rs 4,900 per tonne. The special additional excise duty on petrol continues to remain unchanged at ‘Nil’, while windfall tax on high-speed diesel for exports has been reduced to Rs 5 per litre from Rs 8 earlier. This includes road infrastructure cess of Rs 1.5 per litre. Levy on aviation fuel ATF is been cut to Rs 1.5 per litre. Changes to the windfall tax will be effective from 17 December 2022, the order said. After the latest revision, the tax on oil produced from domestic fields has been lowered by about 65%.
What is windfall tax, why is it imposed?
Windfall tax is levied as a special additional excise duty which is aimed at absorbing the super-profits earned by domestic crude oil producers due to high global crude, product prices, and is revised every fortnight by the central government. The rates of the levies are being changed depending on crude prices and the refining spread. From $108 per barrel in March this year, crude oil prices have come down to around $82 per barrel. Oil prices slid about 2% on Thursday as traders worried about the fuel demand outlook due to a stronger dollar and further interest rate hikes by global central banks. After rising for three straight days, Brent futures fell or 1.8%, to settle at $81.21 a barrel, while US West Texas Intermediate (WTI) crude fell 1.5%, to settle at $76.11.
Indian government first imposed windfall profit taxes on 1 July, joining a growing number of nations that tax super normal profits of energy companies. At that time, export duties of Rs 6 per litre each were levied on petrol and aviation turbine fuel and Rs 13 a litre on diesel. A Rs 23,250 per tonne windfall profit tax on domestic crude production was also levied. The duties were partially adjusted in the following fortnightly review on 20 July, 2 Aug, 19 Aug, 1 Sep, 16 Sep, 1 Oct, 15 Oct, 1 Nov, 15 Nov, 1 Dec, and 15 Dec 2022.
Windfall tax unlikely to be scrapped till oil price above $75/bbl
While the windfall profit tax is calculated by taking away any price that producers are getting above a threshold, the levy on fuel exports is based on cracks or margins that refiners earn on overseas shipments. These margins are primarily a difference of the international oil price realised and the cost. The Windfall gain tax counts toward the government’s income. Hence, the revenue from windfall taxes can help the government make up for the losses.
The windfall tax is expected to generate additional revenues of around Rs 40,000 crore in the current financial year, a senior official had told FE earlier, adding that nearly half of these taxes will likely be paid by private sector companies. If global crude oil prices decline to $70-75/bbl, then the windfall taxes will be scrapped, the official had said. He, however, added that unless this price range is established, the levies may continue subject to fortnight adjustments.