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

Windfall tax came into being in the 1970s with the intent to tax the profit of companies generating huge revenue due to an unprecedented event. However, this tax system has been debated since its initiation. 

The recent windfall tax on crude oil this year is making headlines. However, looking into a dramatic rise in their yearly profit, Government needs to levy a windfall tax on their income. If you want detailed information on this recent windfall tax story, check out below.

Latest Update

The Indian government will remove the windfall tax on crude oil and fuel exports in December 2024. This decision follows a request from the petroleum ministry and is due to low oil prices, making the tax unnecessary.

What is Windfall Tax?

A windfall tax is a higher tax levied by the government on specific industries when the industry experience unexpected and above-average profits due to various global and geopolitical events which are outside the control of the industry. As the name suggests, “windfall” refers to a dramatic and unanticipated increase in profits. On the other hand, “tax” implies an imposition levied on this dramatic income growth. 

The government imposes this tax when it notices a sudden rise in an industry’s revenue. For instance, the recent Russia-Ukraine war benefitted oil and gas industries with a sudden rise in their profits. So, the government imposed a windfall tax on the industries whose profits were positively affected by the said event.

These profits cannot be attributed to something the company was actively involved in, like its business expansion or strategy. Hence, when industries experience massive growth in their income due to external incidents that they are not responsible for, a Windfall Tax is levied on their earnings.

Windfall Tax Impact on Crude Oil, ONGC & Oil Companies in India

As discussed earlier, crude oil prices soared high due to the prevailing war conditions in Russia and Ukraine. Resultantly, the oil companies in India made extraordinary profits marking all-time high net gains during the fiscal year 2022. GAIL, Oil India, and ONGC are among the highest revenue collectors.

The windfall tax on crude oil production and export products was estimated to generate a revenue of Rs.65,600 crore and Rs.52,700 crore, respectively. Besides, Rs.23,250 windfall tax was imposed per tonne of domestic crude oil sales.

However, this tax was brought down and revised, given the oil prices in the international market came down by mid-July. Furthermore, the government revised it again on 2 August 2022, and this time they reduced and increased the taxes on different fields. 

Finally, on 19 August 2022, diesel export taxes increased by Rs.7 per litre. Tax on ATF was brought back to Rs.2 per litre. However, the government reduced the tax on domestic crude oil to Rs.13,330 per tonne. The imposed taxes were once again revised and increased on 31 August 2022. 

The tax rates are revised fortnightly based on oil price fluctuations. On April 4, 2023, India cut the windfall tax on petroleum crude to zero from Rs 3,500 per tonne previously. The levy on crude was hiked to Rs 6,400 per tonne on April 19, 2023. The levy on crude oil was set at Rs.1,850 per tonne on August 31, 2024. The Government of India scrapped the windfall tax on crude oil from September 18, 2024. 

Advantages and Disadvantages of The Windfall Tax

The windfall tax is hiked to make the companies that enjoyed a sudden increase in profit. It will help the government overcome losses from the recent financial crisis. This crisis is affecting the Indian economy, and Government need to compensate for that. The government has planned a windfall tax hike to recover its losses.

This tax will encourage Indian oil companies to put the money they made back into the company. This reinvestment could be in the form of job creation, environmental projects, or infrastructural development. The windfall tax will ensure businesses reinvest their profits to foster innovation, which would ultimately benefit society as a whole.

The crude oil companies became the target for windfall taxes as their profit increased dramatically this year as oil prices soared dramatically due to the war in Europe. The government aims to cut down the prices of certain costly goods and services so that common people can afford them. So, they impose a windfall tax on the profits of such high-earning industries. 

Oil companies generate considerable revenue and act as crucial contributors to the country’s economy. However, these taxes are imposed to ideally bring down the price of the goods and services for the customers.