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What is Windfall Tax and Why Has Govt Reduced it on Fuel Export, Domestic Crude Oil?

By: Business Desk

News18.com

Last Updated: July 20, 2022, 18:00 IST

New Delhi, India

The Centre cut the windfall tax on diesel and aviation fuel shipments by Rs 2 per litre. Photo: ShutterStock

The Centre cut the windfall tax on diesel and aviation fuel shipments by Rs 2 per litre. Photo: ShutterStock

The Centre cut windfall tax on diesel and aviation fuel shipments by Rs 2 per litre and removed additional excise duties of Rs 6 per litre on exports of petrol. What is windfall tax and how will it impact the government and the companies?

To provide relief to oil producers and refiners in the country, the Centre has reduced the recently implemented cesses and levies on diesel and aviation turbine fuel (ATF). The central government also removed the cess on exports of petrol.

Recent Cut in Windfall Taxes, Levies

The Centre cut the windfall tax on diesel and aviation fuel shipments by Rs 2 per litre. It also removed additional excise duties of Rs 6 per litre on exports of petrol. Additionally, the windfall tax on the domestically produced crude oil by about 27 per cent to 17,000 rupees a ton. The Centre also exempted petrol, diesel and ATF from levy of duties when exported from refinery units located in Special Economic Zones.

What is a Windfall Tax?

A windfall tax is a one-off tax imposed by a government on a company. It is levied on an unforeseen or unexpectedly large profit, especially unfairly obtained.

Why Did Government Implement Windfall Taxes?

On July 1, the central government slapped export duties on petrol and ATF (Rs 6 per litre or USD 12 per barrel) and diesel (Rs 13 a lire or USD 26 a barrel) and imposed a windfall tax on domestic crude production (Rs 23,250 per tonne or USD 40 per bbl). The aim was to garner more revenue and limit export to address the fuel shortage in the country.

“As exports are becoming highly remunerative, it has been seen that certain refiners are drying out their pumps in the domestic market. In view of this, cesses equal to Rs 6 per litre on petrol and Rs 13 per litre on diesel have been imposed on their exports. These cesses would apply to any export of diesel and petrol from the country,” the government said in a statement at the starting of this month.

At that time, the finance ministry stated that the taxes will be reviewed every fortnight. It was estimated that these additional taxes will bring Rs 1 lakh crore additional revenue in the full year.

Impact of Windfall Tax

“The last two weeks have seen a massive crash in the refining spreads (or margins) of diesel, gasoline (petrol) and aviation fuel (ATF) coinciding with a cool-off in crude prices from their respective peaks seen in June, brokerage CLSA said.

Post windfall tax, the realised spread on diesel and petrol fell to near loss-making levels while the realisation on aviation fuel (ATF) and crude had also gone below 15-year averages. “A USD 12 per barrel windfall tax on this takes the realised refining spread down to a near loss-making level of just USD 2 per barrel. Similarly, the diesel spread after the export tax of USD 26 per barrel would be a meagre USD 2 a barrel,” CLSA added.

For oil producers, the windfall levy took away 40 per cent of their earnings. On top of it, they also paid royalty and cess, mentioned news agency PTI.

Why Govt Reduces Windfall Taxes and Other Levies

Global crude oil prices have tumbled since mid-June amid concerns about a potential recession. Returns from processing gasoline and diesel in Asia have plunged in recent weeks. Considering the current situation, the Centre has decided to eliminate a levy on gasoline exports and reduced windfall taxes on fuel exports.

Who will Get the Benefit?

This move will help companies such as Reliance Industries Limited, Oil and Natural Gas Corporation, Oil India Limited and Russia’s Rosneft-backed Nayara Energy. “A quicker than expected restart to reverse the windfall taxes on the sector should normalise equity multiples steadily higher. While windfall taxes are not yet zero, we believe government action provides clarity on the path ahead. Reliance Industries, ONGC, and Oil India are key beneficiaries,” said Mayank Maheshwari, equity analyst at Morgan Stanley.

Network18 and TV18 – the companies that operate news18.com – are controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.

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first published:July 20, 2022, 17:15 IST
last updated:July 20, 2022, 18:00 IST