The Indian government has officially scrapped the windfall profit tax on domestically produced crude oil and the export of jet fuel, diesel, and petrol. This decision comes after a notable decline in international oil prices.
Minister of State for Finance, Pankaj Chaudhary, announced the move in the Rajya Sabha on Monday, December 2, 2024. The notification effectively rescinds the order imposed on June 30, 2022, which levied special additional excise duties on crude oil production and fuel exports.
The windfall profit tax, introduced on July 1, 2022, was initially aimed at taxing the supernormal profits of energy companies amid soaring global oil prices.
At its inception, it included duties on exports of petrol, diesel, and aviation turbine fuel (ATF), as well as crude oil production. Petrol and ATF exports were taxed at ₹6 per litre, diesel at ₹13 per litre, and crude oil at ₹23,250 per tonne.
However, these rates were subject to fortnightly reviews based on the average international oil prices over the preceding two weeks.
Over time, the levies fluctuated significantly. Export duties on petrol were removed in the first review in July 2022, while diesel and ATF export taxes were scrapped temporarily in mid-April 2023 but reintroduced later that year.
By March 2024, these levies were removed entirely, reflecting the changing dynamics of global oil prices. For crude oil, the tax rates varied frequently, with the most recent levy of ₹1,850 per tonne in August 2024 reduced to nil shortly thereafter.
The decision to abolish these taxes is attributed to the consistent softening of international oil prices. India’s crude oil import basket averaged $73.02 per barrel in November 2024, marking a decline from $90 per barrel in April of the same year.
This steady decrease in oil prices has lessened the need for such a tax, which was originally implemented to offset government revenue losses during periods of high crude prices.
Since its inception, the windfall profit tax has sparked debate. While it aimed to stabilise government revenue, critics argued that it adversely impacted profitability for oil producers and discouraged production.
For private and foreign players, it created uncertainty in the fiscal environment. The Ministry of Petroleum and Natural Gas had been advocating for its removal, citing its negative impact on the sector.
The revenue generated from the tax has declined over the years, with the government collecting ₹25,000 crore in the first year of its implementation, followed by ₹13,000 crore in 2023-24 and ₹6,000 crore this year.
The primary contributors to the levy were companies like Reliance Industries and Rosneft-backed Nayara Energy, which operate large export-focused refineries in India, and state-owned entities like Oil and Natural Gas Corporation (ONGC) and Oil India Ltd, which produce crude oil domestically.
The removal of this tax is expected to provide a boost to the oil and gas sector. Companies such as ONGC and Oil India Ltd stand to benefit from the removal of levies on domestically produced crude oil. Similarly, private refiners like Reliance Industries and Nayara Energy are likely to gain from the elimination of export duties on fuels.
The windfall profit tax was calculated based on thresholds and margins. Oil producers were taxed on any price above $75 per barrel, while export taxes on fuels were linked to the margins refiners earned on overseas shipments.
These margins, known as "cracks," represent the difference between the realised international oil prices and the cost of production.
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