The Indian government has raised the windfall tax on petroleum crude to 7,000 rupees ($83.78) per metric ton from 6,000 rupees per metric ton, effective from July 16, a notification issued on Monday showed. (While $1 = 83.5510 Indian rupees).
The tax is levied in the form of Special Additional Excise Duty (SAED).The export of diesel, petrol and Aviation turbine fuel (ATF) has been kept unchanged.
Previous Revision of Windfall Tax
In the previous revision on July 1, the government had raised the windfall tax on petroleum crude to Rs 6,000 per metric ton from Rs 3,250. This measure was introduced to control private refiners who preferred selling fuel internationally to capitalize on strong refining margins instead of supplying it domestically.
What is Windfall tax?
A windfall tax is a type of surge tax which is imposed on energy companies to prevent them from earning above-average or abnormal profits fueled by the country’s economic conditions. These profits are typically due to external events, not because of any particular strategy or initiative by the company itself.
This tax is targeted at an industry that is commodity-driven to keep a check on the corporates. India first charged the windfall tax on profits on July 1, 2022, and the tax rates are reviewed every fortnight on the basis of oil prices for the last two weeks. The government levies an additional tax on these high profits.
How it might effects crude oil companies?
Windfall taxes can have several effects on crude oil companies
- The most immediate impact is a reduction in profits. The tax directly eats into their bottom line, taking a chunk of their windfall gains. This can affect shareholder dividends, executive bonuses, and overall company financial health.
- Companies may become more cautious about investing in new exploration, production, or refining projects. With less profit available, they might prioritize maintaining current operations over expansion or innovation.
- In some cases, a windfall tax could lead to reduced production. If the tax makes domestic oil production less profitable, companies might shift resources towards international projects with lower tax burdens.
- On the flip side, the government gains additional revenue from the windfall tax. This revenue can be used for various purposes, such as subsidizing consumer fuel costs, funding social programs, or investing in renewable energy sources.
- Windfall taxes are often implemented and adjusted based on market fluctuations. This uncertainty can create challenges for companies in terms of long-term planning and budgeting.