Introduction

On December 2, 2024, the Indian government withdrew the windfall gains tax on domestic crude oil production and fuel exports (diesel, petrol, and aviation turbine fuel - ATF). This tax, initially imposed in July 2022, was introduced in response to the surge in global oil prices following Russia's invasion of Ukraine. Its removal reflects the current global oil market stability and the improved fuel supply situation in India.

What is Windfall Gains Tax?

Definition

A windfall tax is a levy imposed on unexpected profits that result from extraordinary events, such as geopolitical crises or market disruptions. In the case of India, the tax was applied to the super-normal profits of oil producers and fuel exporters due to the global energy turmoil.

Key Features

• Domestic Crude Oil: The Special Additional Excise Duty (SAED) was imposed on domestic crude oil production.
• Fuel Exports: A combination of SAED and Road and Infrastructure Cess (RIC) was levied on diesel, petrol, and ATF exports.

Rationale Behind the Windfall Gains Tax

Immediate Context

The tax was introduced during a period of soaring global crude oil prices, driven by the Russia-Ukraine conflict. India, which imports over 85% of its oil, faced concerns about the availability of fuels and the impact of rising prices on domestic consumption. The tax was seen as a way to:

• Ensure Domestic Fuel Supply: By discouraging excessive fuel exports during a period of global supply chain disruptions.
• Increase Government Revenue: The tax aimed to capture windfall profits and offset the duty cuts on domestic fuel sales.

Global Context

Other countries also implemented similar windfall taxes during this period, as energy companies saw record profits due to the price surge.

Decline in Windfall Gains Tax Revenue

Revenue Collection

The windfall gains tax initially raised significant revenue, but the amount has decreased over time due to falling global oil prices:

• FY 2022-23: Rs 25,000 crore
• FY 2023-24: Rs 13,000 crore
• FY 2024-25 (so far): Rs 6,000 crore

This decline, combined with reduced oil prices, led to the tax being effectively inactive before its formal withdrawal.

Withdrawal of the Windfall Gains Tax

Reasons for the Withdrawal

• Global Stabilization: Crude oil prices, which had exceeded $100 per barrel, have now stabilized under $75 per barrel, with no immediate signs of a significant price surge.
• Domestic Fuel Availability: There is now a robust fuel supply in the domestic market, making the tax less necessary.
• Declining Revenues: With the tax generating diminishing returns, it was no longer economically viable for the government to maintain it.

Impact of the Scrapping

The government's move to scrap the windfall gains tax is seen as a signal of stability and predictability in the taxation regime. It assures the oil industry that the government is confident in the stability of global oil prices and supply chains.

Criticism of the Windfall Tax

Industry Opposition

The windfall tax faced opposition from the oil industry, which argued that it:

• Reduced Profitability: The tax limited the profits of publicly listed companies like ONGC and Reliance Industries.
• Discouraged Oil Production: By making the taxation environment unpredictable, it deterred investment in oil exploration and production in a country that is heavily dependent on oil imports.
• Created Uncertainty: Frequent revisions of the tax led to an unstable business environment.

Conclusion

The scrapping of the windfall gains tax is a significant policy shift. It not only provides relief to oil companies but also signals a more predictable and stable taxation regime. By withdrawing the tax, the government is fostering a conducive environment for future investments in domestic oil production and signaling its confidence in the stability of global oil prices. This move is a crucial step in ensuring that India’s energy policies remain adaptable and aligned with the evolving global market conditions.