Windfall Tax On Crude Oil, Diesel Hiked

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, 08/16/23)

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Why in the news?

• Recently, the government has increased the windfall profit tax on domestically produced crude oil and diesel exports. The tax, collected through a special additional excise duty, has been raised from ₹4,250 to ₹7,100 per tonne on domestically produced crude oil.
• Additionally, the levy on overseas shipments of ATF (Aviation Turbine Fuel) has been reintroduced.

What is the windfall tax?

• A windfall tax is a higher tax rate levied by governments against certain industries when economic conditions allow those industries to experience above-average profit.
• The United States Congressional Research Service (CRS) defines a windfall as an “unearned, unanticipated gain in income through no additional effort or expense”.
• 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.
• When the difference between the cost of crude oil and the value of refined products like diesel, ATF, and petrol exceeds $20 per barrel, a levy is applied to their exports.

Global status on levying windfall taxes

• A total of 24 EU countries have announced, proposed or implemented a windfall tax on energy companies, which European Commission officials put forward after energy prices soared at the start of 2022.
• The UK has also imposed a levy on profits made from the extraction of oil and gas from the North Sea.

Impact of windfall taxes

Positive Impact

• Supplementary stream of revenue: The government aims to tap into the additional revenue generated by the oil industry during times of elevated prices.
• Redistribution of unexpected gains when high prices benefit producers at the expense of consumers.
• To maintain domestic supply: The government aims to control the flow of crude oil within the country as some refiners were favoring exports over domestic sales
• These additional revenues help in funding social welfare schemes and also in keeping lower trade deficit

Negative Impact

• Uncertainty: Windfall taxes are imposed retrospectively and are often influenced by unexpected events, this uncertainty of taxes can impact investments in this field.
• For instance, a similar tax was introduced by the U.S in the 1980s on domestic oil companies, the revenue it generated for the government was significantly lower than what it had projected, while the tax also reduced domestic oil production and increased imports.
• Populist measure: It is believed that such taxes are populist and politically expedient in the short term.
• Punitive in nature: Companies argue that profit is a reward for the industry's risk-taking in providing the end user with petroleum products.
• Determination: Another issue is whether to tax only the large corporations that account for the majority of high-priced sales or also smaller corporations. This raises the question of whether producers with revenues or profits below a certain threshold should be exempt.

Status of India’s crude oil exports

• Russia has become India's primary crude oil supplier, surpassing West Asian countries, with a 27% share of India's crude imports in February. This increase is attributed to discounted Russian oil after the Ukraine war.
• India has expanded its refined petroleum product exports, notably to Argentina, Ecuador, Egypt, Iraq, and European countries due to a ban on Russian diesel imports by the European Union.
• Despite this, India's overall oil exports fell by 18% in April 2023 due to lower international crude oil prices, leading to a narrower oil trade deficit of 16%.

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Similar question can be asked on Windfall tax

Question: Which one of the following best describes the term “Merchant Discount Rate” sometimes seen in the news? (UPSC-2018)

(a) The incentive given by a bank to a merchant for accepting payments through debit cards pertaining to that bank.

( b) The amount paid back by banks to their customers when they use debit cards for financial transactions for purchasing goods or services.

(c) The charge to a merchant by a bank for accepting payments from his customers through the bank’s debit cards.

(d) The incentive given by the Government to merchants for promoting digital payments by their customers through Point of Sale (PoS) machines and debit cards.