What is the windfall tax on crude oil? Why has Indian government increased it?

Akshata Kamath
Akshata KamathAug 03, 2022 | 13:31

What is the windfall tax on crude oil? Why has Indian government increased it?

The Indian government has increased the windfall tax on crude oil and reduced it on the export of diesel and Aviation Turbine Fuel (ATF) from August 2, 2022. While the tax on crude oil has increased from Rs 17,000 to Rs 17,750 per tonne, the tax on exports of diesel and ATF has been reduced from Rs 11 to Rs 5/ litre and Rs 4/litre to nil respectively. 

First, what is windfall tax? A windfall tax is a one-off tax that the government levies on companies in a specific industry. In this case, it's Crude Oil, Petrol and Diesel.

When certain industry-specific companies benefit from an event or a one-off external situation that they were not responsible for and make sudden windfall profits, these profits are taxed separately and known as windfall tax. These taxes are over and above the normal taxes that these companies pay to the governments. 

Second, why there is a windfall tax in India: Oil companies across the world have been making windfall profits due to rising international crude oil prices. This gives the government an easy opportunity to make money, ie. by levying windfall taxes. As per Moody's, the Indian government expected to generate Rs 94,800 crore in windfall taxes from oil companies. Thus following the trends set by other countries, on July 1, 2022, the Indian government too levied a windfall tax on the export of Aviation Turbine fuel (ATF), Petrol, Diesel and on the production of Crude oil.

The government has two intentions: to make windfall profits and to keep a check on the constant supply of crude oil in the domestic market. Since the government observed that many refiners preferred to export crude oil instead of selling it within the country, the government has

  • mandated oil exporters to fulfill the Indian domestic oil demand first and 
  • has levied windfall taxes on exports to indirectly make exporting oil more expensive. 
Quenching domestic demand is a priority for the government. Photo: India Today Archives

Third, how often and when does this tax change? The tax depends on fuel prices, and the Indian government had declared that it would review the tax every 15 days. 

When the windfall tax was first levied on July 1, 2022, Indian oil companies were expected to pay taxes of: 

  • Rs 6/ litre on petrol and ATF exports
  • Rs 13/ litre on diesel exports
  • Rs 23,250 per tonne on the production of crude oil.

When international oil prices softened during mid July, 2022, the windfall taxes came down.   

  • Tax on petrol exports was reduced from Rs 6/litre to Nil
  • Tax on ATF exports came down from Rs 6/litre to Rs 4/ litre, 
  • Tax on diesel exports reduced from Rs 13/ litre to Rs 11/ litre,
  • Tax on the production of crude oil came down from Rs 23,250 per tonne to Rs 17,000/ tonne.

As per schedule, India has again revised the windfall tax from August 2, 2022, and it looks like this:

  • Tax on petrol exports continues to be Nil
  • Tax on ATF exports has been scrapped entirely, thus reducing it from Rs 4/litre to nil,
  • Tax on diesel exports has come down from Rs 11/litre to Rs 5/litre
  • Tax on the production of crude oil has increased from Rs 17,000 per tonne to Rs 17,750 per tonne.

As per Moneycontrol, the government is reducing windfall taxes since the profits of fuel exporters and oil producers are reducing thanks to reducing fuel prices and taxes.  

Last updated: August 03, 2022 | 14:38
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