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Why India has cut windfall tax on Fuel exports?

  • Published
    20th Jul, 2022
Context

The Indian government has cut the recently imposed cesses and levies on diesel and aviation turbine fuel (ATF) and removed the cess on exports of petrol.

About

Background

  • Due to the Global crude prices are rising and domestic crude producers were making windfall gains, the government is trying to back the economy from recession.
  • Private oil marketing companies were exporting petrol and diesel to foreign countries like Australia for better realisation.
  • The shortage of fuel at retail outlets because of the oil marketing companies were not willing to sell the commodity at a loss since prices had not increased despite rising crude and depreciating rupee.

What is Windfall Tax?

  • A windfall tax is a higher tax rate on sudden big profits levied on a particular company or industry.
  • Domestic producers sell crude oil to domestic refineries at international parity prices, thus making windfall gains.

Reason for Duty cuts on fuel

  • Addressing Fuel Shortage: With an aim to address the issue of fuel shortage in the country, the government had imposed special additional excise duty on export of petrol and diesel.
  • Cesses equal to 6 per litre on petrol and Rs.13 per litre on diesel were imposed on their exports.
  • Global Recession: The government also imposed a cess of Rs.23, 250 per tonne (by way of special additional excise duty) or windfall tax on domestic crude being sold to domestic refineries at international parity prices.
  • The government has also exempted petrol, diesel and ATF from levy of duties when exported from refinery units located in Special Economic Zones.

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.

Government Interventions

  • Incentivise the oil production: To incentivise higher domestic output, the cabinet committee on economic affairs has decided to provide greater pricing power to domestic oil producers to enable market-determined price discovery.
  • CCEA’s decision thus could result in ONGC gaining by 7-8% from its crude and spur more investments in exploration and drilling, resulting in higher output. 
  • Inclusion of Oil producers: They deregulate the crude sales and the waiver from allocating domestically produced oil only to government-owned refineries.
  • PPP model: The largest state-owned producer, ONGC, thus can auction its output from Mumbai High to any refinery in the public and private sector. 
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