Axe the oil windfall tax: It’s outlived its rationale

Source: The post is based on the article “Axe the oil windfall tax: It’s outlived its rationale” published in Live Mint on 2^nd August 2023.

Syllabus: GS 3 – Growth & Development

Relevance: concerns with windfall tax

News: According to a recent government notification, India’s windfall tax on petroleum crude has increased significantly to ₹4,250 per tonne from ₹1,600, and diesel now incurs a levy of ₹1 per litre, which was previously nil.

Are these windfall taxes justified?

The windfall tax was first introduced in India’s oil sector in mid-2022, shortly after the outbreak of the Russia-Ukraine war. At that time, it was considered justifiable as it aided in the fiscal recovery of the nation after the pandemic.

Since the extra profits earned by the oil companies arose from external factors rather than any strategy, windfall taxes appeared reasonable and beneficial for the government.

However, despite the economic recovery, these taxes persist, worsening the tax situation in India.

Must Read: Explained | What is windfall tax and why are countries imposing it on the energy sector?

What are the concerns with these windfall taxes?

First, these taxes are being levied even though price of crude has decreased below early war levels, representing normalcy.

Second, the fortnightly tax review on oil and diesel is perceived as a means to extract revenues from the sector.

This state intervention results in business uncertainty and distorts not only the oil industry’s operations but also India’s energy outlook.

Third, state intervention also raises concerns about attracting investments for the green transition in India, given the lack of policy stability.

Hence, the state intervention to control retail fuel prices has failed to allow market forces to reshape the sector. Any such reform becomes more complex due to the frequent changes in windfall taxes.

What can be the way ahead?

First, taxes tend to become permanent. Therefore, it has been more than a year since the windfall taxes, and it requires them to be rolled out.

Second, the hydrocarbon sector should be protected from other taxes and integrated into the GST regime.

Third, a system of carbon pricing should be implemented in the oil sector. However, before implementing such a system, there is a need to address the current complex tax liabilities in the sector.