What is the Windfall Tax? Tax on Oil Companies, ONGC, and Crude Oil in India

Industries that generate unforeseen and excessive profits as a result of outside world forces beyond their control are subject to a special tax known as a windfall tax. In July 2022, India enacted the Windfall Tax to control the exceptional profits made by oil firms, following the Russia-Ukraine war, which led to a spike in crude oil prices. Nevertheless, the tax ended on December 2, 2024, due to industry concerns that it hindered production and the fact that falling crude oil prices made it less effective. Oil firms benefit financially from this decision, which also increases exports and promotes more production. It is important to keep track of the ongoing modifications of the windfall tax, and the impact it has on the economy and public.

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Table of Contents

What is Windfall Tax?

Applicability of Windfall Tax in India

Impact of Windfall Tax on Oil Companies, ONGC, and Crude Oil in India

Advantages and Disadvantages of Windfall Tax in India

Why was the Windfall Tax Abolished in India?

Conclusion

Frequently Asked Questions

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What is Windfall Tax?

A windfall tax is a greater tax that the government imposes on particular industries when those industries see above-average and unexpected earnings as a result of numerous geopolitical and global events that are beyond their control. A "windfall," as the term implies, is a sharp and unexpected rise in profits. However, the word "tax" suggests that this sharp increase in revenue is subject to an imposition.

When the government observes a sharp increase in an industry's revenue, it levies this tax. For example, the oil and gas companies saw a sharp increase in revenues as a result of the recent conflict between Russia and Ukraine. Therefore, the government levied a windfall tax on the businesses whose earnings increased as a result of that incident. The company's strategy or corporate expansion, for example, cannot be directly linked to these gains. Therefore, a windfall tax is imposed on industries' profits when they see a sharp increase in revenue as a result of outside events for which they bear no responsibility.

Applicability of Windfall Tax in India

In July 2022, the Indian government introduced a Windfall Tax on crude oil production and exports, prompted by the rising crude oil prices due to the Russia-Ukraine conflict. This decision resulted in significant profits for Indian oil companies like GAIL, Oil India, and ONGC. Crude oil output brought an outstanding Rs. 65,600 crore for the government, while exports pulled in Rs. 52,700 crore. To manage these unexpected profits, they imposed a tax of Rs. 23,250 per tonne on domestic crude oil sales. Moreover, the levies on diesel, aviation turbine fuel (ATF), and domestic crude oil saw revisions on August 2, August 19, and August 31, 2022, reflecting the shifts in the global oil market.

By 2023, adjustments to windfall tax rates were still in play, responding to the fluctuations of crude oil prices. The tax on petroleum crude hit zero on April 4, 2023, but was reinstated at Rs. 6,400 per tonne on April 19, 2023. It saw another change on August 31, 2024, dropping to Rs. 1,850 per tonne. Ultimately, on December 2, 2024, the Indian government decided to eliminate the windfall tax, citing the stabilization of global crude prices and a return to normal profit levels in the industry. It effectively wrapped up this temporary fiscal measure.

Impact of Windfall Tax on Oil Companies, ONGC, and Crude Oil in India

As was previously said, the ongoing conflict in Russia and Ukraine caused crude oil prices to skyrocket. As a result, during the fiscal year 2022, the oil corporations in India achieved unprecedented profits, setting a new record for net earnings. The top revenue collectors are ONGC, Oil India, and GAIL. A whopping Rs. 65,600 crore was gathered from the windfall tax on crude oil production, while Rs. 52,700 crore came from export goods. Additionally, there’s a windfall tax of Rs. 23,250 for every tonne of domestic crude oil exported.

However, due to the decline in global oil prices by mid-July, this tax was reduced and changed. Additionally, on August 2, 2022, the government made another revision, raising and decreasing taxes in various fields. The government raised fuel export taxes by Rs. 7 per litre on August 19, 2022. In a contrasting move, the government lowered the domestic crude oil tax to Rs. 13,330 per tonne. Just a couple of weeks later, on August 31, 2022, those taxes were once again raised and modified.

Based on changes in the price of oil, the tax rates are adjusted every two weeks. On April 4, 2023, India made a significant change by slashing the windfall tax on petroleum oil from Rs 3,500 per tonne to zero. Just a couple of weeks later, on April 19, 2023, the refinery tax was raised, jumping to Rs 6,400 per tonne. Then, a new crude oil levy of Rs 1,850 per tonne became effective on August 31, 2024. On December 2, 2024, the Indian government eliminated the windfall exemption.

Advantages and Disadvantages of Windfall Tax in India

The benefits and drawbacks of India's windfall tax are listed below:

Advantages of Windfall Tax 

• Revenue Generation for Economic Stability: By taxing sectors that have made unexpected large profits, the windfall tax helps the government's recovery from financial crisis losses. Public welfare initiatives and economic stabilization are two uses for this extra money.

• Promotes Reinvestment: One of the key benefits of implementing a windfall tax is that it encourages oil companies to reinvest their surplus profits in vital areas such as environmental initiatives, infrastructure upgrades, and job creation. It not only helps the community but also fosters innovation and supports sustainable growth in the long run.

• Controls Inflation and Lowers Prices: The tax aims to control inflation and bring down prices by redistributing surplus income. This way, it helps make essential products and services more affordable for everyday people.

• Fair Contribution from Profitable Industries: The windfall tax ensures that instead of pocketing all the extra profits, the crude oil companies, which have seen significant gains from rising global prices, contribute their fair share to the economy.

Drawbacks of Windfall Tax

• Prevents Expansion and Investment: High taxation on excess profits can demotivate businesses from expanding or investing in new projects.  They might hesitate to expand their operations or make new investments because they’re worried about not seeing the returns they hoped for.

• Uncertainty in Business Planning: Because windfall taxes are subject to change based on changes in global prices, it is challenging for businesses to plan long-term strategies, which has an impact on the stability of their operations.

• Potential Financial Burden on Customers: Businesses may raise the costs of goods and services to pass on the windfall tax to customers, negating the tax's intended benefits.

Why Was the Windfall Tax Abolished in India?

In India, the Windfall Tax ceased to exist since it had started to yield less revenue in recent months due to a decline in global crude oil prices. Industry stakeholders raised alarms that this tax might discourage future production, potentially stunting the sector's long-term growth. Additionally, the case for maintaining the tax got weakened by the decreasing profitability of oil companies. To enhance the financial health of oil businesses, the government plans to scrap the windfall tax, which will also encourage increased production and exports. This decision creates a more competitive and investment-friendly environment, aligning with the overall strategy to stimulate growth in the energy sector.

Conclusion

To wrap things up, India introduced the Windfall Tax as a temporary measure to rein in the soaring profits of the oil industry, driven by global crude oil price hikes. Although it initially helped maintain market stability and provided revenue for the government, its effectiveness diminished as oil prices became more stable. Scrapping the tax signals a shift towards encouraging more production, boosting exports, and fostering growth within the industry. With this move, the government aims to create a more attractive and competitive environment for investment in the energy sector, ensuring that companies in this field can thrive in the long run.

FAQs

Q1. What is a Windfall Tax?

A windfall tax is a unique tax levied by the government on businesses that generate unanticipated and exorbitant profits as a result of outside global circumstances beyond their control, including supply chain interruptions or geopolitical conflicts.

Q2. Why did India introduce the Windfall Tax?

To control the excessive gains made by oil firms as a result of the spike in global crude oil prices after the Russia-Ukraine war, India implemented the Windfall Tax in July 2022.

Q3. Which industries in India were affected by the Windfall Tax?

The production of crude oil and the export of petroleum products such as diesel and aviation turbine fuel (ATF) were the primary targets of India's Windfall Tax.

Q4. Is there any recent change on windfall tax on petroleum crude?

With effect from July 16, 2024, the government increased the windfall tax on petroleum crude to Rs. 7,000 per metric tonne in a notification dated July 15, 2024.

Q5. Is there any recent change in windfall tax on the export of diesel, petrol and aviation turbine fuel?

As of July 15, 2024, the notification indicates that there will be no changes to the windfall tax concerning the export of gasoline, diesel, and aviation turbine fuel.

Q6. Is windfall tax still applicable to crude oil?

On December 2, 2024, the Indian government announced its decision to repeal the windfall tax on crude oil.

Q7. What was the initial Windfall Tax rate in India?

The government introduced a tax on domestic crude oil sales back in July 2022, setting it at Rs. 23,250 per tonne.

Q8. How was the Windfall Tax adjusted over time?

Before being phased out in December 2024, the tax underwent several revisions in August 2022, April 2023, and August 2024, all aimed at adapting to fluctuations in global oil prices.

Q9. What are the benefits of abolishing the Windfall Tax?

It appears that removing the Windfall Tax will enhance oil companies' financial results, promote increased output, and increase exports, making the energy sector more attractive to investors.