Windfall Profit Tax On Crude Oil, Diesel Exports Cut

Relevance: GS 3 - Changes in industrial policy and their effects on industrial growth. GS 2 - Government policies and interventions for development in various sectors and issues arising out of their design and implementation

(Source: The Hindu, 11/17/2023)

Why in the news?

• Recently, the government of India cut the windfall profit tax on crude oil produced in the country and on exports of diesel.

What are windfall taxes?

• A windfall tax, or one-time tax, is a higher tax rate levied by governments against certain industries when economic conditions allow those industries to experience above-average profit.
• According to the United States Congressional Research Service, a windfall is an undeserved or unforeseen increase in revenue that results from neither additional labor nor expense.
  • These gains cannot be directly linked to something the company actively did, like an investment plan or a corporate development.
• They are imposed retroactively along with the regular rates of tax on such earnings.

India’s new windfall tax rates

• Crude oil: India has cut its windfall tax on domestically produced crude oil, which is levied in the form of the Special Additional Excise Duty (SAED).
  • The SAED on crude oil has been reduced to ₹6,300 per tonne from ₹9,800 per tonne.
• Diesel: The SAED on the export of diesel was reduced from ₹2 per liter to ₹1 per liter.
• ATF and petrol: The levy on the export of aviation turbine fuel (ATF) and petrol has been maintained at zero.
• The new tax rates came into effect on 16th November 2023.

Previous rate revisions

• India first imposed windfall profit taxes on July 1, 2022, by levying export duties of ₹6 per liter each on petrol and ATF and ₹13 a liter on diesel.
  • A windfall profit tax of ₹23,250 per tonne was also imposed on crude oil produced by companies such as ONGC.
• The levy on domestic crude oil dropped to nil in the first half of April but was brought back in the second half in accordance with the changes in international fuel prices.
• The levy on ATF was brought back in the second half of August from nil in March while the export tax on petrol was scrapped in the very first review.
• In the previous revision of the windfall taxes (November 1st, 2023), the tax on crude oil was hiked from ₹9,050 per tonne to ₹9,800 per tonne.
• The levy on the export of diesel was halved from ₹4 to ₹2 while the levy on ATF was reduced from ₹1 to 0.

Why have windfall taxes been changed?

• A windfall tax is levied on domestic crude oil if rates of the global benchmark rise above $75 per barrel.
• The tax rates are reviewed every fortnight based on average oil prices in the previous two weeks.
• A levy is imposed on the export of diesel, ATF, and petrol if product cracks (or margins) rise above $20 per barrel.
  • Product cracks or margins: It refers to the difference between crude oil (raw material) and finished petroleum products.
• Present scenario: The easing of international oil prices since the last revision has led to the government implementing a reduction in windfall taxes.
  • The average price of the basket of crude oil imported by India dropped to $84.78 per barrel in comparison to $90.8 per barrel (October) and $93.54 per barrel (September).

• Other reasons for revising windfall taxes:

• • Redistribution of unforeseen profits
  • Provide support for social welfare programmes,
  • Mechanism to reduce the nation's expanding trade deficit.
  • Additional source of revenue for the government.

Challenges associated with windfall taxes

• Market uncertainty: According to experts, the imposition of windfall taxes can cause market confusion about future taxes.
  • This is mainly because windfall taxes are applied retroactively and are influenced by unanticipated events.
  • Therefore, the industry may not be able to predict and account for the levy which in turn can affect investments in linked sectors.
• Populist nature: Such windfall taxes have been criticized as populist and having a short-term political advantage.
  • The IMF has also criticized the imposition of taxes in reaction to price increases can have design issues due to their political nature.
• Reward vs Risk: Businesses have claimed that the unforeseen profits were a reward for their appetite for risks in supplying petroleum at a cheap rate.
  • Therefore, they claim that it is unfair to tax them their rewards.
• Applicability of taxation: Critics have also questioned whether the tax should be levied on small corporations as well as the large corporations that account for the majority of sales.
  • Some observers have suggested that those corporations making less than a specified amount of revenue or profit should be exempted from the levy.

Conclusion

• India's recent revision of windfall taxes on crude oil, diesel, and other petroleum products reflects a responsive and balanced approach to global market conditions and the need for effective fiscal policies to ensure sustained economic growth.