After a four-year run, windfall tax nears end of the road

New Delhi: The Centre has decided to scrap the windfall tax, a levy imposed on local production of crude oil and exports of petrol, diesel and jet fuel, at a time of subdued oil prices.

A decision to this effect has been taken at the top level in the government, and the finance ministry may shortly issue an order, two people familiar with the development said.

Windfall tax was imposed in 2022, as a surge in oil prices to multi-year highs in the wake of the Russia-Ukraine war allowed oil and gas companies to make windfall profits. The tax is levied in the form of a special additional excise duty, and as additional excise duty or road and infrastructure cess on the export of fuel. It is reviewed every fortnight, based on their average prices in the preceding two weeks.

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"The petroleum ministry recently wrote to the finance ministry and sought scrapping of the levy. With oil prices remaining subdued, there is not much significance in the levy anymore," said one of the two people quoted above.

Queries emailed on Thursday to the petroleum and finance ministries remained unanswered.

Outlived utility

The decision to scrap the windfall tax has been guided by the government’s view that this levy has outlived its utility. Since domestic oil producers and refiners are allowed to realize global prices from the Indian market, windfall tax fetches a share of the profits of the oil companies to the government.

Windfall tax on crude oil produced in the country was lowered to zero on 18 September from ₹1,850 a tonne that was in force in the first fortnight of the month.

In line with the softening global oil prices, the government has gradually dialled back all the elements of the windfall tax, but businesses expect certainty in taxation by doing away with the fortnightly review and revision altogether. Businesses consider the tax regime before entering oil exploration, production and refining, sectors requiring hefty capital investment.

Also read | Govt slashes windfall tax on petroleum crude to ₹1,850/tonne

The road and infrastructure cess on exported diesel has been kept at zero from 4 March 2023, and the special additional excise duty on it has been lowered to zero from 1 March, 2024. The special additional excise duty on exported jet fuel has been set at zero from 2 January 2024 from Re 1 a litre earlier. The road and infrastructure cess as well as the special additional excise duty on export of petrol was brought down to zero from 19 July 2022. The government had also exempted petrol, diesel and jet fuel exported from special economic zones from windfall tax from 20 July 2022 onwards.

“Scrapping the windfall tax on exported finished petroleum products is beneficial for Indian exporters competing in the world market," said Abhishek Jain, indirect tax head and partner at KPMG.

Crude oil prices have remained subdued in the past few months. Since August, it has stayed below the $80 a barrel mark, and the highest level in the past one year is about $89 per barrel. This is despite the prolonged production cuts by the OPEC+ alliance. The January contract of Brent last traded at $71.04 per barrel, lower by 2.09% from its previous close.

Oil market outlook weak

The planned withdrawal of the levy comes at a time when the outlook for the global oil market is largely weak, and prices are not seen surging near the all-time high levels reached in 2022 anytime soon.

Rating agency ICRA on 14 November projected that global crude oil demand growth would decelerate significantly from pre-covid levels, primarily due to the muted demand from China, the world's second-largest oil consumer. It anticipates that this downtrend signals that crude markets may be entering a tipping zone, characterized by weakening growth dynamics owing to accelerating electrification.

Also read | Windfall tax on petroleum crude slashed to ₹2,100 from ₹4,600/tonne

Girishkumar Kadam, senior vice-president and group head, corporate ratings, ICRA Ltd, said: “Weakening Chinese demand, impacted by factors like large scale renewable capacity addition, burgeoning electric vehicle sales, prolonged real estate slump, vast national high-speed rail network, substantial share of LNG and electric trucks and an ageing population – may be a drag on global oil prices. The crude oil demand growth going forward is likely to significantly trail the pre-Covid historical average annual growth rate."