India first imposed windfall profit taxes on July 1, 2022 joining a growing number of nations that tax super normal profits of energy companies. Representational file image.
| Photo Credit: Reuters

The government on Monday (December 2, 2024) scrapped 30-month old windfall profit tax on domestically-produced crude oil and on export of jet fuel (ATF), diesel and petrol following a decline in international oil prices.

Minister of State for Finance Pankaj Chaudhary tabled a notification in Rajya Sabha scrapping the levy on crude oil produced by firms like state-owned Oil and Natural Gas Corporation (ONGC) and exports of fuels done by companies like Reliance Industries Ltd.

The notification rescinded June 30, 2022 order and withdrew levy of special additional excise duty (SAED) on production of crude oil (which is refined into fuels like petrol and diesel) and on export of aviation turbine fuel (ATF), diesel and petrol, he said.

Alongside, the road and infrastructure cess (RIC) levied on export of petrol and diesel has also been withdrawn.

India first imposed windfall profit taxes on July 1, 2022 joining a growing number of nations that tax super normal profits of energy companies. At that time, export duties of ₹6 per litre ($12 per barrel) each were levied on petrol and ATF and ₹13 a litre ($26 a barrel) on diesel.

A ₹23,250 per tonne ($40 per barrel) windfall profit tax on domestic crude production was also levied.

The tax rates were reviewed every fortnight based on average oil prices in the previous two weeks.

While the levy on export of petrol became nil in the very first fortnightly review that happened in mid-July 2022, the tax on diesel and ATF exports became nil in mid April 2023 but were back in August that year. There has been no levy on export of ATF and diesel since March this year.

As far as crude oil is concerned, the levy fluctuated every fortnight. It was ₹1,850 per tonne in August 31, 2024 and became nil in the next fortnightly review.

Now, the levies on both domestically produced crude oil and fuel exports have been scrapped.

The government had garnered about ₹25,000 crore from the levy in the first year of its implementation, ₹13,000 crore in 2023-24 and ₹6,000 crore this year.

Reliance Industries Ltd, which operates India’s largest only-for-export oil refinery at Jamnagar in Gujarat, and Rosneft-backed Nayara Energy are primary exporters of fuel in the country.

The government levied tax on windfall profits made by oil producers on any price they get above a threshold of $75 per barrel.

The levy on fuel exports is based on cracks or margins that refiners earn on overseas shipments. These margins are primarily a difference between the international oil price realised and the cost.

The decision to scrap the levy follows softening in international oil prices. The basket of crude oil that India imports averaged $73.02 per barrel in November, down from $75.12 a barrel in the previous month.

The import price was about $90 per barrel in April this year but has continued to slide in subsequent months. It fell to $73.69 per barrel in September but rose marginally in the following month.

Since its levy, the windfall profit tax has been a subject of controversy. While it initially sought to balance government revenue amid fluctuating oil prices, industry players argued that it negatively impacted profitability and disincentive production. For private and foreign players, it brought in an element of uncertainty in the fiscal regime.

The Ministry of Petroleum and Natural Gas too had been lobbying for its removal for some time now.

While doing away with tax on domestically-produced crude oil will benefit ONGC and Oil India Ltd, the scrapping of levy on fuel exports would help Reliance and Nayara.