Government scraps windfall tax on crude oil, petrol, diesel and ATF

The government of India has scrapped the special additional excise duty, also popularly known as the windfall tax, on domestically produced crude petroleum oil and on the export of petrol, diesel, and Aviation Turbine Fuel (ATF). The government has also scrapped the Road and Infrastructure Cess levied on the export of petrol and diesel.

The Union Ministry of Finance announced the scrapping of these taxes on 2 November 2024. 

The government of India imposed the windfall tax on 1 July 2022 to target the abnormal profits earned by oil companies due to the sudden increase in the prices of crude petroleum oil and its products caused by the Russia-Ukraine war. 

The decision to scrap the tax was taken after review by the Prime Minister’s Office (PMO), the Revenue Department, and the Union Petroleum Ministry.

Why was the windfall tax imposed?

• According to the government, Indian oil refiners imported crude oil from abroad, refined it in India and sold the petrol, diesel, and aviation turbine fuel in the international market as the prices were very high. This resulted in a shortage of petroleum products in various parts of the country. 
• The Indian government imposed a special additional excise duty or windfall tax to discourage oil companies from exporting petroleum products and crude oil from India.
• This was expected to increase the supply of these petroleum products within the country and also bring down prices.
• The money collected through the tax was to be used by the government to fund various welfare programmes. 
• The government also reviews these special taxes every 15 days and increases or decreases them depending on the oil price in the international market. 

Why has the government scrapped the Tax?

There are several reasons behind the government's decision to scrap the windfall tax on petroleum products.

• The price of crude oil in the international market has stabilised, and the government does not expect a sudden increase in the price.
• The revenue collected from the windfall tax also shows a declining trend. The revenue collection through this tax was around Rs 25,000 crore in 202-23  to about `Rs 6,000 crore in 2024-25.
• The domestic producers of crude oil opposed the windfall tax as it negatively impacted their profitability and disincentivised domestic production. 
• It also introduced uncertainty amongst foreign and Indian investors in the petroleum sector. 

Windfall Tax or Special Additional Excise Duty

•  It is a special tax imposed on companies that earn abnormal profits due to a sudden increase in the price of the goods they sell. 

• In India, domestic crude oil prices are linked to international prices. As the international price increases, the domestic price increases automatically, resulting in abnormal profit for crude oil-producing companies like ONGC, Oil India Limited, and Vedanta Limited and petroleum product exporting companies like Reliance Industries Limited.