Centre Hikes Windfall Tax On Domestic Crude, Cuts Levy On Export Of Diesel, ATF

Relevance: GS3 - Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. GS2 - Government policies and interventions for development in various sectors and issues arising out of their design and implementation

(Source: The Hindu, 09/30/2023)

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Why in the news?

Recently, the Union government raised the special additional excise duty (SAED) on crude petroleum to ₹12,100 per tonne with effect from September 30.

Windfall tax hike

• Crude petroleum: The windfall tax on domestically produced crude was raised from ₹10,000 to ₹12,100/tonne by the Government of India.
• Diesel: The duty on the export of diesel was reduced from ₹5.50 per liter to ₹5 per liter.
• ATF: The duty on jet fuel or Aviation Turbine Fuel (ATF) has been lowered from ₹3.5 per liter to ₹2.5 per liter.
• Petroleum: The Special Additional Excise Duty (SAED) on petrol has been retained at zero.

What is a windfall tax?

• A windfall tax is one that is levied by the government on certain industries that are experiencing significantly above-average profits i.e. windfall gain due to certain economic conditions.
• These windfall gains can be due to irregular rises in demand or interruptions in supply as a result of geopolitical disruptions, natural disasters, or wars.
• They are usually imposed when there is a sudden increase in profits in a particular sector or if it is necessary to temporarily boost public spending at the same time.

Windfall tax in India

• India first imposed windfall taxes in July 2022 to tax the windfall gains made by domestic crude producers selling crude at international benchmarked pricing amid the Russia-Ukraine war.
• At the same time, government spending had increased as a result of the lowered central excise charge and additional expenditures on food and fertilizer.
• Therefore, the government levied a windfall tax of ₹6/liter on petrol and ATF and ₹13/liter on diesel to accommodate the shortfall.
• The tax rates are reviewed every fortnight based on average oil prices in the previous two weeks.

Why is the windfall tax imposed on crude?

Rise in prices

• A windfall tax is levied on domestic crude oil if the rates of the global benchmark rise above $75 per barrel.
  • Export of diesel, ATF, and petrol attract the levy if product cracks rise above $20 per barrel.
• At present, crude prices are in excess of $90 per barrel amid supply concerns.
  • OPEC+ as well as Saudi Arabia and Russia have announced voluntary cuts.
  • The potential increase in demand due to heating requirements in the winter could potentially raise prices.

Availability

• As a result of exports becoming more remunerative, refiners have begun to export more of their stock which could lead to concerns over domestic availability.
  • Windfall taxes help control imports and exports and regulate supply chain issues.

What are some benefits associated with windfall tax?

• Boost government revenue: The imposition of a windfall tax boosts the government’s revenue which can be used to provide public services like infrastructure, healthcare, sanitation, etc.
• Service debt: Additional funds raised via a windfall tax can help the country service its debt to global financial institutions and other countries.

What are the challenges associated with a windfall tax?

• Economic risks: Windfall taxation is an arbitrary taxation system that could increase the risks of investing.
  • As a result, investors may demand a higher return on their investments or reduce their investments.
  • The reduction in dividend payout affects pension funds and insurance companies that are the major investors in such companies.
• Lack of funding: It eliminates an easy source of funding by reducing the amount of profits left over for corporate reinvestment.
• Unpredictable and unfair nature: It makes the tax system unpredictable and might deter businesses from making capital expenditures.
  • This could slow economic growth and lead to the migration of large MNCs.
  • It is considered unfair as businesses are not informed in advance and also affects smaller firms that do not make such a high windfall during supply shortages.
• Rising energy costs: It could reduce the funds available for investment in alternate sources of fuel like greener and cleaner fuels.
  • As a result, the price of energy could rise significantly.
• Exports: If imposed on products exported by India, it could reduce the quantity of exports due to the increase in costs.
• Inflation: Imposing a windfall tax can be difficult due to inflationary conditions which could lead to losses in the market.

Conclusion

• Windfall taxes are used by governments to capture excess profits in certain industries during extraordinary circumstances.
• Although they can boost government revenues and support public services, they also pose challenges such as economic costs, and environmental impacts.

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FAQs

MCQs

Question: In the context of global oil prices, “Brent crude oil” is frequently referred to in the news. What does this term imply?

1. It is a major classification of crude oil.
2. It is sourced from North sea.
3. It does not contain sulphur.

Which of the statements given above is/are correct? (UPSC CSE 2011)

(a) 2 only

(b) 1 and 2 only

(c) 1 and 3 only

(d) 1, 2 and 3