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How India’s windfall tax could hurt oil companies but help the economy.

Why in the News?

The government slapped an export tax on petrol, diesel and jet fuel (ATF) shipped overseas, and imposed a windfall tax on crude oil produced locally.

What is the Windfall tax?

A windfall tax is a tax levied by governments against certain industries when economic conditions allow those industries to experience above-average profits.

The idea is to target firms that were lucky enough to benefit from something they were not responsible for -in other words, a windfall.

In other words, windfall tax is imposed on companies that have seen their profits extraordinarily not because of any clever investment decision or an increase in efficiency or innovation, but simply because of favourable market conditions. In may 2022, the UK levied a 25% tax on extraordinary profit from North Sea oil and gas production.

Windfall for oil companies in current situation

 Russia’s attack on Ukraine has upset the supply chain.

Also, The World is emerging from the pandemic and the demand for oil has increased compared to last year.

These two factors have led to the steep rich in crude oil price. As a result of which, oil and gas companies around the world are minting money.

And these gains are not coming because of any improvement in their processes but because of the geopolitical situation.

Why have these taxes been imposed?

  1. To address the shortage of fuel at retail outlets in the country

The shortage of fuel at retail outlet was because oil marketing companies were not willing to sell fuel at a loss.

Fuel price have not increased despite rising crude and depreciating rupee. As a result, oil marketing companies started losing Rs 20-25 per litre on diesel and Rs 10-15 per litre on petrol.

Private oil marketing companies were exporting petrol and diesel to foreign countries like Australia for better realisation.

The move will discourage companies for exporting petrol and diesel.

  • Better revenue realisation

The move will fetch more revenue to the exchequer.

These taxes will make up for than three-fourths of the revenue that the government lost when it cut excise duty on petrol and diesel to cool soaring inflation. The government had May cut excise duty on petrol by Rs 8 per litre and diesel by Rs 6 a litre to cool record inflation.

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