The Indian Finance Ministry is set to review the effectiveness of the windfall tax on the export of petrol, diesel, and Aviation Turbine Fuel (ATF), as global crude oil prices continue to stabilise, sources revealed on Thursday. The windfall tax was initially introduced in July 2022 to curb the extraordinary profits made by some oil refiners who were exporting fuel at the expense of domestic supply, particularly when crude prices surged.
The review of the windfall tax and the associated revenue mobilisation is now under consideration, with sources indicating that the Ministry of Petroleum and Natural Gas has already communicated with the Finance Ministry about the potential changes.
The move to revisit the windfall tax comes after a series of adjustments. In September, the government slashed the windfall tax on domestically produced crude oil to zero, a significant shift in policy. The tax, which is levied as Special Additional Excise Duty (SAED), is calculated fortnightly based on the average oil prices over the preceding two weeks. The last revision, which took effect from August 31, saw the windfall tax on crude petroleum set at Rs 1,850 per tonne.
Meanwhile, the SAED on the export of petrol, diesel, and ATF has been retained at zero from September 18, suggesting a shift in the government’s approach as global oil prices stabilise. When first imposed in 2022, the windfall tax aimed to recapture some of the exceptional profits made by oil companies during periods of high crude prices, which in turn had led to soaring fuel export revenues. These profits were seen as coming at the expense of domestic consumers, who were facing higher prices.
India’s decision to impose the windfall profit taxes was part of a broader global trend, with several countries introducing similar measures to curb the excess profits of energy companies. The tax policy, however, has had mixed reactions, with concerns from the oil industry about its impact on investment and the competitiveness of Indian refiners in the global market.
The Ministry of Petroleum and Natural Gas has also suggested extending the windfall tax policy to include natural gas. In a letter to the Finance Ministry, it has proposed bringing natural gas under the Goods and Services Tax (GST) regime, which would help streamline taxation and improve the efficiency of tax collection. However, this proposal is still pending and will need to be considered by the GST Council, which is headed by the Union Finance Minister.
Natural gas is currently excluded from the GST framework, which means it is subject to various state and central taxes that could lead to inefficiencies. Including natural gas under GST could simplify the tax structure and potentially reduce costs for consumers, particularly in the power and fertiliser sectors, where natural gas is a key input. It would also align India with global tax practices, as many countries already include natural gas in their VAT or GST systems.
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The windfall tax, while aimed at ensuring that oil companies contribute fairly during periods of high profits, has also been criticised for its impact on investment. Some analysts argue that such taxes could disincentivise future investment in the oil and gas sector, particularly in refining capacities, as companies seek to avoid the financial risks associated with volatile tax regimes. With crude oil prices stabilising and expectations of a more balanced market in the coming months, the government may opt to ease or remove the windfall tax to support the industry and encourage growth.
The global oil market has been unpredictable over the past few years, with prices fluctuating due to various geopolitical tensions, supply disruptions, and shifts in demand. While crude oil prices have shown signs of stabilising recently, there remains uncertainty about future price trends. Any decision to remove or adjust the windfall tax will likely take into account these broader market conditions, as well as the need to maintain fiscal balance.
As the Finance Ministry evaluates the windfall tax, it will be crucial for the government to weigh both the fiscal benefits of the tax and the potential impact on the oil sector. Given the broader economic implications, any adjustments to the policy will be closely watched by both industry stakeholders and consumers.
