The Centre has reduced the windfall profit tax levied on domestically produced crude oil, as well as on diesel and aviation turbine fuel exports (ATF). The new tax rates go into effect on Friday.
Windfall tax rates have been revised:
Levy on domestically produced crude oil – ₹1,700 per tonne from ₹4,900.
Tax on the export of diesel- ₹5 per litre from ₹8.
Tax on the export of ATF to – ₹1.5 a litre from ₹5.
What exactly is windfall tax?
Windfall tax is an additional levy levied on businesses whose profits have been boosted solely by chance or events for which they are not responsible. It is common in the energy sector for oil refining companies to benefit from factors unrelated to their investment or strategy. For example, the global spike in energy prices caused by Russia’s invasion of Ukraine has increased these companies’ profits.
It is calculated by deducting any price that producers receive above a predetermined threshold.
On July 1, India began levying a windfall tax on crude oil producers as well as levies on gasoline, diesel, and aviation fuel exports after private refiners sought overseas markets to benefit from robust refining margins rather than selling at lower-than-market rates in the country. The government has revised the windfall tax almost every two weeks since then.
The effect of the rate cut :
1) Windfall tax boosts the government’s earnings by syphoning money from the deep pockets of oil companies; however, PSUs such as Oil and Natural Gas Corporation Ltd (ONGC) also operate in the sector, reducing government revenue from these companies.
2) Because the Centre has reduced the tax cut, it may reduce the cost consumers pay if businesses decide to pass on the gains to them.
3) The jet fuel windfall tax has been reduced significantly, from 5 to 1.5 percent. According to Live Mint, ATF accounts for 30-40% of the cost of running an airline in India, and lowering its prices will increase profit margins. If the companies allow it to percolate, it may reduce ticket prices to encourage the price-sensitive market.
4) The cuts, however, come amid a 14% drop in global crude since November. This helps energy companies balance any unexpected profits. So it remains to be seen whether the government’s easing has any positive impact on consumer spending.
5) According to experts, one of the reasons the government lowered the rates was that it was not making a significant profit from it. According to a month-old report from Live Mint, the government has only managed to earn 2,500-3,000 crore per month from the levy, far less than what is required to compensate for revenue losses due to excise cuts.
