WINDFALL PROFIT TAX

TAG: GS 3: ECONOMY

THE CONTEXT: Recently, the government has decided to cut the windfall profit tax on crude oil produced in the country and on exports of diesel in line with softening international oil prices.

EXPLANATION:

• The windfall profit tax, in the form of Special Additional Excise Duty (SAED), on domestically produced crude oil has been decreased to ₹6,300 per tonne from ₹9,800 per tonne.
• SAED on the export of diesel has been reduced to ₹1 per litre from ₹2 per litre.
• However, the tax on the export of jet fuel (ATF) and petrol remains at zero.
• The government regularly revises these taxes based on international crude oil price fluctuations. The recent reduction follows a drop in global oil prices.

Impact of International Oil Prices:

• The adjustment in taxes is directly influenced by changes in international oil prices.
• A decline in global crude oil rates from previous months prompted the government to revise the taxes downward.
• The tax rates have been subject to multiple revisions since their introduction in July of the previous year.
• These changes respond to shifts in international oil prices and product margins.

Windfall Tax Criteria:

• The windfall tax is triggered when the global benchmark surpasses $75 per barrel for crude oil and when product cracks or margins exceed $20 per barrel for diesel, ATF, and petrol.

Product Cracks/Margins Explanation:

• Product cracks/margins denote the difference between the cost of crude oil (raw material) and the value of the finished petroleum products.

Tax Exemptions and Restorations:

• There have been instances where taxes were temporarily suspended due to price fluctuations but were later reinstated when market conditions changed.

Dynamic Tax Adjustments:

• The government’s approach to these windfall profit taxes demonstrates a dynamic response to volatile global oil markets.
• Tax revisions are frequent and directly tied to the benchmark oil prices and product margins, showcasing a measure to balance domestic interests against global market fluctuations.

Industry and Economic Impact:

• Reductions in windfall taxes on crude oil and diesel exports aim to alleviate the financial burden on domestic producers and exporters in the petroleum industry.
• By reducing taxes during periods of lower international oil prices, the government aims to support the industry’s competitiveness and maintain economic stability.

Policy Flexibility:

• The government’s fortnightly reviews and adjustments showcase an agile policy framework that responds promptly to changing market conditions.
• This flexibility allows for quick adaptations to protect domestic interests and maintain revenue streams.

Market Sensitivity:

• The taxation system’s sensitivity to global oil price benchmarks indicates the government’s intent to strike a balance between maximizing revenue and preventing undue pressure on consumers and industries reliant on petroleum products.

Key Players:

• Major players like Reliance Industries Ltd and Nayara Energy offers insight into the significance of these companies in India’s fuel export market and their potential influence on the nation’s economy.

Potential Challenges:

• Despite these adjustments, continued fluctuations in global oil prices could pose ongoing challenges for policymakers, requiring them to continuously monitor and adjust tax rates to maintain equilibrium.

Conclusion:

• The government’s decision to reduce windfall profit taxes on crude oil and diesel exports reflects a proactive approach to manage the impact of international oil price fluctuations on the domestic economy.
• This agile tax policy seeks to strike a balance between supporting the industry and safeguarding consumer interests while ensuring a competitive environment for key players in the petroleum sector.
• The detailed fortnightly reviews and adjustments illustrate the government’s responsiveness to the dynamic nature of global oil markets.

SOURCE: https://www.thehindu.com/business/Economy/windfall-profit-tax-on-crude-oil-diesel-exports-cut/article67539574.ece