Centre revises windfall tax for third time, cuts tax on domestic crude oil

This is the third revision in the windfall levy imposed on July 1. The cess is reviewed fortnightly taking into consideration the global crude prices.

The new rates will be applicable from Friday (August 19), according to a notification issued by the finance ministry.

A windfall tax is a one-off tax imposed by a government on a company. When a company benefits from something that they are not responsible for, the financial gain that ensues is called windfall profits.

Governments, typically, levy a one-time tax over and above the normal rates of tax on such profits, and that is called windfall tax.

India imposed windfall taxes on July 1, joining a growing number of nations that taxes super normal profits of energy companies. But international oil prices have cooled since then, eroding profit margins at both oil producers and refiners.

At the time of imposing the windfall tax, the government had stated that the objective behind the move was to shore up domestic supplies as refiners were preferring to export than to meet the local requirements.

Earlier this month, the government had scrapped the windfall profit tax on ATF (Aviation Turbine Fuel) exports. Alongside, the tax on domestically produced crude oil has been cut to Rs 13,000 per tonne from Rs 17,750.

On July 1, export duties of Rs 6 per litre ($12 per barrel) were levied on petrol and ATF and a Rs 13 a litre tax on the export of diesel ($26 a barrel). A Rs 23,250 per tonne windfall profit tax on domestic crude production ($40 per barrel) was also levied.

Thereafter, in the first fortnightly review on July 20, the Rs 6 a litre export duty on petrol was scrapped, and the tax on the export of diesel and jet fuel (ATF) was cut by Rs 2 per litre each to Rs 11 and Rs 4, respectively. The tax on domestically produced crude was also cut to Rs 17,000 per tonne.

Thereafter, on August 2, the export tax on diesel was cut to Rs 5 a litre and that on ATF scrapped, following a drop in refinery cracks or margins. But the levy on domestically produced crude oil was raised to Rs 17,750 per tonne in line with a marginal increase in international crude prices. At the third fortnightly review, the taxes on fuel exports has been raised but that on domestically produced crude oil has been cut.

The reduction in taxes earlier this month came as India's trade gap swelled to a record high in July as elevated commodity prices and a weak rupee inflated the country's import bill.

The gap between exports and imports widened to $31.02 billion in July from $26.18 billion in June. This, as a result of exports falling and elevated commodity prices together with a weak rupee, are inflating the import bill. Imports jumped 43.59 percent in July from the year-ago month, while exports dropped 0.76 per cent.

International oil prices have since then slid to below $95 per barrel but cracks on diesel and ATF rose. Industry sources said the government is working on a principle to leave some healthy margins, with both crude oil producers and refiners and taxing gains over and above that.