Windfall Tax: Managing Oil Profits and Consumer Burden in India

According to a government order announced on Thursday 29, February, the government increased its windfall tax on petroleum crude to ₹4,600 a metric ton from ₹3,300 with effect from March 1. India has reduced the windfall tax on fuel from ₹1.50 per litre to zero

Windfall Tax

A windfall tax is a tax imposed by the government on companies that make unusually large profits from a sudden or unexpected increase in the price of a commodity or service. With effect from March 1, 2024, the Indian government has increased the windfall tax on domestically produced crude oil from ₹3,300 per tonne to ₹4,600 per tonne. 

This is a way of collecting some of the extra revenue that oil producers earn from the high global oil prices. However, the government has also reduced the windfall tax on diesel to zero from ₹1.50 per litre, while keeping the tax on petrol and jet fuel at nil. 

This is a measure to ease the burden on consumers and transporters, who have been facing high fuel prices in the domestic market. The average oil price for the two weeks before is used to adjust the windfall tax rates every two weeks. 

The administration raised the windfall tax on crude oil produced domestically for the third time in February. On February 15, the tax on fuel was increased from zero to ₹1.5 per liter, while the windfall tax was hiked from ₹3,200 per tonne to ₹3,300 per tonne.

Why does India change the windfall tax on crude petroleum? 

Based on the mean oil price over the preceding two weeks, the government modifies the windfall tax rate every two weeks. The main reasons for changing the windfall tax are:

  • To collect some of the extra revenue that oil producers earn from the high oil prices.
  • To ease the burden on consumers and transporters, who have been facing high fuel prices in the domestic market.
  • To balance the trade deficit and the government spending, which have increased due to the weak rupee and the recent cut in Central Excise Duty.

Windfall Tax

Is windfall tax on crude petroleum in India so high? 

Comparing the windfall tax rates in India with other countries is not straightforward, as different countries have different methods and criteria for calculating and imposing the windfall tax. Nonetheless, a few broad conclusions may be drawn:

  • India’s windfall tax is higher than some of the major oil-producing countries, such as Saudi Arabia, Russia, and the US, which do not have a specific windfall tax on oil, but rather use other forms of taxation, such as royalties, income tax, and excise duty.
  • India’s windfall tax is lower than some of the countries that have a progressive windfall tax system, such as Norway, Algeria, and Venezuela, which charge higher tax rates as the oil prices increase.
  • India’s windfall tax is similar to some of the countries that have a flat windfall tax system, such as China, Ecuador, and Kazakhstan, which charge a fixed tax rate regardless of the oil prices.

Therefore, the windfall tax in India is not so high compared to some of the countries that have a progressive windfall tax system, but it is higher than some of the countries that do not have a specific windfall tax on oil.

Pros and Cons of Windfall Tax India

The windfall tax on crude petroleum in India is a tax imposed by the government on oil producers who benefit from the high global oil prices. Some of the pros and cons of the windfall tax are:

Pros

  • It redistributes the unexpected gains of oil producers to the government and the consumers, who suffer from high fuel prices4.
  • It funds social welfare schemes and public services, such as health, education, and infrastructure4.
  • It provides an additional revenue stream for the government, which helps to reduce the trade deficit and the fiscal deficit.
  • It encourages oil producers to reinvest their surplus profits into the industry and the broader economy.

Cons

  • It reduces the profit margins of oil producers by imposing a levy on their excess earnings from high oil prices4.
  • It discourages investments and leads to reduced production, potentially causing a supply shortage and further driving up prices. 
  • It exposes oil producers to the risk of frequent changes in the tax rates depending on the oil price fluctuations. 

Therefore, the windfall tax has both positive and negative impacts on the oil industry and the economy.

Go to Bscnursing Homepage To Get Relevant Topics.

Leave a Comment