• Recently, the government called off a three-week old tax imposed on the export of petrol. Windfall taxes on shipments of diesel and ATF, and on domestically produced crude oil was also cut.

What is windfall Tax?

• Windfall taxes are imposed by a government against certain industries when they experience above-average profits due to economic conditions.
• Windfall taxes are primarily directed on companies in a certain industry that sees the most windfall economically.

Background

• India imposed windfall taxes on July 1, following the super normal profits of energy companies. But since then, international oil prices have cooled down, and profit margins have eroded for both oil producers and refiners. International crude prices slumped on concerns of a global recession.
• On July 1, the government levied export duties amounting to Rs 6 per litre of $12 per barrel on petrol and ATF, while it imposed Rs 13 a litre or $26 a barrel on diesel. The government imposed Rs 23,260 per tonne or $40 per barrel windfall tax on crude production.

Objective

• The above taxes were slapped to garner more revenue as well as to limit exports.
• The government stated that the objective was to shore up domestic supplies as refiners were preferring to export than to meet the local requirements.
• The government expected to bring over Rs 1 lakh crore additional revenue in the full year.

 Implications

• Once the windfall taxes were imposed, the realised spread on diesel and petrol fell to near loss-making levels. The realisation on ATF and crude also dipped to below 15-year averages. After the windfall tax, the realised spread on petrol was just $2 per barrel. The diesel spread too fell in a similar manner to $30 a barrel, while ATF crashed to $25-30 a barrel.
• As per a report, the windfall tax scrapped away 40 per cent of earnings for oil producers. This is apart from the royalty and cess that they are required to pay.
• However, Brent crude price cooled off by $15-20 per barrel in the past couple of weeks to $100 per barrel.
• The government corrected the anomaly that was the result of the windfall taxes.
• The slashing of windfall taxes is expected to benefit Reliance that operates two oil refineries in Gujarat, out of which one is focussed only on exports, state-owned ONGC and Oil India Ltd, and Vedanta Ltd that account for almost all of the crude oil produced in the country, and Russia’s Rosneft-backed Nayara Energy, which operates a 20 million tonnes a year refinery at Vadinar in Gujarat.