Withdrawal of Windfall Gains Tax on Crude Oil and Fuel Exports

Context : The government has withdrawn the windfall gains tax on domestic crude oil production and fuel exports, including diesel, petrol, and aviation turbine fuel (ATF), as of December 2, 2024.

Background

• Introduction: Imposed on July 1, 2022, during a surge in global crude oil and fuel prices caused by Russia's invasion of Ukraine, to address concerns over domestic fuel availability.

• Purpose: Designed to tax unexpected profits due to external factors like the energy price surge, with the goal of funding welfare schemes and narrowing the trade deficit.

Reasons for Withdrawal

• Global Stabilisation: Oil prices have fallen from over $100 to under $75 per barrel, and supply chains have stabilised.
• Domestic Market Stability: Fuel availability in the domestic market is robust, and revenues from the tax have declined significantly.

Criticism of Windfall Tax

• Market Uncertainty: Retrospective imposition discouraged investments in the energy sector.
• Profitability Concerns: Companies argued the tax penalised profits earned through industry risks.
• Populist Nature: Seen as politically driven and poorly designed, with unclear criteria on who should be taxed.

Impact

• Revenue Decline: Collections reduced from ₹25,000 crore in FY23 to ₹6,000 crore so far in FY25.
• Stakeholders: Minimal financial impact on major producers and exporters, but the withdrawal signals confidence in market stability and reduced risk of supply shocks.

Conclusion

The removal of the windfall gains tax reflects improved market conditions, a stable global oil environment, and a focus on fostering investment-friendly policies.