Govt Revises Windfall Tax – What’s Windfall Tax And Who Will Be Affected? EXPLAINED

Windfall tax is imposed by a government when certain businesses start to gain financially with no reason being theirs. In India, it was imposed on July 1 as crude oil producers' pockets grew deeper when the world oil market stumbled with the Russian invasion of Ukraine.

Written by: India.com News Desk Edited by: Sankunni K

Published: August 19, 2022, 4:55 PM IST

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Govt Revises Windfall Tax - What's Windfall Tax And Who Will Be Affected? EXPLAINED

New Delhi: On July 1, the government of India introduced windfall taxes amid domestic crude producers enjoying a bite of the cherry from the global impact of Russia-Ukraine war. Domestic players reaped huge profit by selling crude to refiners at internationally benchmarked prices. The government of India then levied Rs 23,250 per tonne windfall tax on domestic crude production. On August 18, yesterday, the government of India cut the windfall tax on crude oil to Rs 13,000 per tonne – the 3rd revision since its introduction.

Key Points

• Windfall tax is basically a tax imposed to taper your earnings when you hit a jackpot where your effort is practically nil. The Ukraine war skyrocketed oil prices that inched towards $140 per barrel. And the domestic crude makers reaped huge margin as they sold at prices benchmarked on international prices.
• In the latest development, the government of India has revised the windfall taxes levied on crude oil, diesel and Aviation Turbine Fuel (ATF). The tax on domestically produced crude oil has been slashed to Rs 13,000 per tonne from Rs 17,750 per tonne. The export tax on jet fuel, which stood at zero, has been increased to Rs 2 and the excise duty on the export of diesel has been hiked to Rs 7 from Rs 5. However, the export duty on petrol continues to be zero.
• When the government introduced windfall tax on July 1, an export duty of Rs 6 per litre on petrol and ATF, Rs 13 per litre on diesel were levied. Also, Rs 23,250 per tonne windfall tax on domestic crude production was levied. In its first fortnightly review of the tax, the government scrapped the Rs 6 per litre export duty on petrol; that of jet fuel and diesel was cut to Rs 4 and Rs 11 respectively. In the next review, the export duty on jet fuel was scrapped, while that on diesel was slashed to Rs 5.

Who Earns, Who Loses

The government of India has garnered around Rs 2,500-3,000 crore in the first five weeks after the introduction of these windfall taxes, the Business Standard reported. A month back, the Moody’s had predicted that the windfall tax on domestic crude and fuel exports will earn the government a revenue close to USD 12 billion (Rs 94,800 crore).

“The tax increase will reduce the profits of Indian crude producers and oil exporters like Reliance Industries Limited (RIL) and Oil and Natural Gas Corporation Ltd (ONGC),” the Moody’s said.

In the plain sight, we can see that windfall tax adds to the government’s earnings and takes money away from the deep pockets of oil companies. But government also stands to lose a portion of its revenue. The government has signed production sharing contracts with oil producers through which the government gets a share of the profits made, the Moneycontrol reported. As the profits decrease, the government also stands to lose some money in its share. The report also adds that the government has been getting generous dividends from PSUs, including oil and gas producers. When the windfall taxes hit these companies, and their profits come down, the government’s share in dividends will also come down.