Windfall Gains Tax on Oil Production and Fuel Exports Removed

Source: The post Windfall Gains Tax on Oil Production and Fuel Exports Removed has been created, based on the article “Windfall gains tax on oil production, diesel-petrol export removed: The impact, explained” published in “Indian Express” on 5th December 2024

UPSC Syllabus Topic: GS Paper 3 – Indian Economy and issues relating to planning, mobilisation, of resources, growth, development and employment.

Context: The article discusses the Indian government’s recent decision to remove the windfall gains tax on domestic crude oil production and exports of fuels such as petrol, diesel, and aviation turbine fuel (ATF). Windfall Gains Tax on Oil Production and Fuel Exports Removed.

What is the windfall gains tax and why was it imposed?

Definition: The windfall gains tax was a set of cesses imposed on domestic crude oil production and exports of diesel, petrol, and aviation turbine fuel (ATF) to tax super-normal profits.

Reason for Imposition: It was introduced on July 1, 2022, due to:

1. The surge in global oil and fuel prices after Russia’s invasion of Ukraine.
2. Concerns about fuel availability in the domestic market as exporters prioritized international markets.

What are its components?

1. On crude oil and ATF exports: Special Additional Excise Duty (SAED).
2. On diesel and petrol exports: SAED and Additional Excise Duty (AED), also known as Road and Infrastructure Cess (RIC).

Why has the windfall gains tax been removed?

1. Global Oil Price Decline: Crude oil prices have dropped to under $75 per barrel from over $100 at the tax’s inception.
2. Stabilized Fuel Supply: Global energy markets and domestic fuel availability have stabilized post the initial Ukraine war shock.
3. Revenue Decline: Tax collections fell significantly over the years.
4. Current Status: The levies on diesel, petrol, and ATF exports, as well as domestic crude oil production, had already been reduced to nil by early 2024.

What is the impact of the removal?

• For Oil Producers and Exporters:
  • No major financial impact on companies like ONGC, Oil India, Reliance Industries, and Nayara Energy as the tax was already nil.
  • Creates a favourable environment for investment and profitability by signalling a predictable tax regime.
• Industry Sentiments:
  • Addresses concerns about reduced profitability and unpredictability of frequent tax reviews.
  • May encourage efforts to increase domestic oil production in a country heavily reliant on imports.

What does the removal signal about the government’s stance?

• Confidence in Market Stability: Indicates the government’s belief that global oil and fuel prices, as well as supply shocks, are unlikely to escalate in the near future.
• Commitment to Stability: Assures the oil industry of a reliable and stable taxation regime, fostering a conducive environment for growth.