Centre has slashed the windfall profit tax levied on domestically produced crude oil and on export of diesel and Aviation Turbine Fuel (ATF). The new tax rates are effective from Friday.

Revised Windfall tax rates

Levy on crude oil produced by domestic companies- 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 is windfall tax?

Windfall tax is an extra levy on companies whose profits have been boosted purely by luck, or events for which they are not responsible. It often happens in the energy sector that oil refining companies have benefitted from externals – not related to their investment or strategy. For instance, the global spike in energy prices on account of Russia’s invasion of Ukraine has boosted the profits of these companies.

It is calculated by taking away any price that producers are getting above a defined threshold.

On July 1, India started imposing the windfall tax on crude oil producers and levies on exports of gasoline, diesel and aviation fuel after private refiners sought overseas markets to gain from robust refining margins, instead of selling at lower-than-market rates in the country. Since then, the government has been revising the windfall tax almost every two weeks.

Impact of the rate cut

1) Windfall tax strengthens the government’s earnings by drawing away money from the deep pockets of oil companies, however Public state undertaking (PSUs) like Oil and Natural Gas Corporation Ltd (ONGC) too operate in the sector, it in turn also dents government revenue from these companies.

2) As Centre has lowered the tax cut, it may also ease the cost consumer pays if companies decide to pass on the gains to them.

3) There is a substantial cut in the jet fuel windfall tax, lowering it to 1.5 from 5. ATF makes up, according to Live Mint, about 30-40% of the cost of running an airline in India, and a decrease in its prices will boost the profit margins. If the companies allow it to percolate, to encourage the price sensitive market, it may reduce ticket fare.

4) However, the cuts come amid a 14% slump in global crude since November. This balances any unexpected profit for energy companies. So it has to be seen that the easing by the government materialises into any positive impact on consumer purse.

5) Experts say that one of the reason government lowered the rates was, it anyways was not getting substantial sum from it. A month-old report from Live Mint states, the government has managed to earn only 2,500-3,000 crore a month from the levy, far less than it needs to compensate for the losses in revenue due to excise cuts.

(Inputs from Agencies)

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