India cuts windfall tax on crude oil

India has slashed the windfall tax on the export of crude oil from Rs 11,000 to Rs 9,500 per tonne and has hiked it for Aviation Turbine Fuel (ATF) and diesel.

Background:

• The government initially introduced the windfall tax on July 1, 2022.
• The Centre had initially imposed a cess of Rs 23,250 per tonne on crude oil.
• The notification containing the revised tax structure shall come into force immediately.
• Windfall gains are being accumulated by domestic crude producers due to rising global crude prices.
• Private refiners Reliance Industries Ltd and Rosneft-based Nayara Energy are the primary exporters of fuels like diesel and ATF.

Global Crude Prices:

• Global crude prices had risen and domestic crude producers were making windfall gains on exports.
• Private oil marketing companies were exporting petrol and diesel to foreign countries like Australia for better realization.
• The shortage of fuel at retail outlets was because oil marketing companies were not willing to sell the commodity at a loss since prices had not increased despite rising crude and depreciating rupee.

Reasons behind imposing these Taxes:

• The special additional excise duty on the export of petrol and diesel to address the issue of fuel shortage in the country.
• Fuel pumps across the country have been reporting fuel shortages, leading to their closure.
• As exports are becoming highly remunerative, it has been seen that certain refiners are drying out their pumps in the domestic market.
• The levy was also seen as a step to compensate for the reduction in the excise duty on petrol and diesel to provide relief to consumers.

About Windfall Tax:

• Windfall taxes are designed to tax the profits a company derives from an external, sometimes unprecedented event— for instance, the energy price rise as a result of the Russia-Ukraine conflict.
• These are profits that cannot be attributed to something the firm actively did, like an investment strategy or an expansion of business.
• A windfall is defined as an “unearned, unanticipated gain in income through no additional effort or expense”.
• Governments typically levy a one-off tax retrospectively over and above the normal rates of tax on such profits, called windfall tax.
• One area where such taxes have routinely been discussed is oil markets, where price fluctuation leads to volatile or erratic profits for the industry.

Impacts of Windfall tax:

• On External Trade: For India, which imports 85% of its requirements, costlier oil implies a higher import bill and inflation, besides straining the current account, the broadest measure of India’s goods and services transactions with the rest of the world.
• Less Investment: Investments in the Oil sector and related industry hit hard after the spur in Windfall tax.

Issues with Imposing Windfall Tax:

• Uncertainty in the Market: Since windfall taxes are imposed retrospectively and are often influenced by unexpected events, they can brew uncertainty in the market about future taxes.
• Populists in Nature: It is believed that such taxes are populist and politically opportune in the short term.
• Reduces Future Investment: Introducing a temporary windfall profit tax reduces future investment because prospective investors will internalize the likelihood of potential taxes when making investment decisions.
• Not Defined Precisely: It is not defined what exactly constitutes true windfall profits and how it can be determined what level of profit is normal or excessive.