Windfall gains tax on oil production, diesel-petrol export removed: The impact, explained

But a lot has changed since then. After the initial shock and supply concerns due to the war in Ukraine, the global oil and fuel flows have shifted and stabilised. International crude oil and fuel prices are significantly lower and there is a robust supply of fuels in the domestic market. Primarily due to these reasons, the windfall gains tax was not generating significant revenue. In fact, the levy was already nil when the government decided to put this tax to rest.

While the levy on petrol exports had been zero since July 20, 2022, on diesel exports, it had been nil since March 1, 2024. On ATF exports, windfall gains tax was reduced to nil from January 2, 2024, while on domestic oil production, the levy was brought down to zero from September 18, 2024. Therefore, for all practical purposes, the tax was already dead. It has now been buried.

When it was first introduced on July 1, 2022, the windfall gains tax on domestic crude oil was Rs 23,250 per tonne, which translated to roughly $40 per barrel. Crude oil prices were well over $100 per barrel at the time. They are now under $75 per barrel and it is unlikely that they will shoot up, unless there is another major supply shock. As for diesel exports, the initial levy was Rs 13 per litre. Exports of ATF and petrol initially attracted a levy of 6 rupees per litre.

What was the windfall gains tax and why was it imposed?

“Windfall gains tax” was a term used to describe cesses under the ambit of central excise imposed on fuel exports and domestic crude oil production, to tax super-normal profits of fuel exporters and oil producers. In case of domestic crude oil and ATF exports, the windfall gains tax was in the form of Special Additional Excise Duty (SAED), while on diesel and petrol, it was a combination of SAED and Additional Excise Duty (AED), the latter also known as Road and Infrastructure Cess (RIC).

The duties are reviewed every fortnight based on the movement in margins on fuels in the international market and global crude oil prices. In the first revision itself, the levy on petrol was reduced to nil and was not hiked since.

These levies were first imposed on July 1, 2022, due to the surge in global oil and fuel prices in the aftermath of Russia’s invasion of Ukraine. As the price of crude oil produced in India is benchmarked to international prices, domestic oil prices also went through the roof. At the same time, margins on fuels were a lot more lucrative in other markets, incentivising refiners, particularly the private sector players, to export fuels. This had resulted in fuel supply disruptions in some parts of the country.

Apart from taking a share of windfall profits of oil producers and fuel exporters to partly soften the blow of duty cuts on domestic petrol and diesel sales, the government also wanted to ensure enough fuel supply to meet domestic demand through these taxes.

India was not alone in imposing a windfall gains tax. Several other countries had imposed taxes to tax super-normal profits of energy companies in the months following Russia’s February 2022 invasion of Ukraine.

Scrapping the levy: Impact and signal

The country’s oil industry was understood to have been against the windfall tax regime even when it was introduced. Those against the tax argued that it limited profitability of publicly listed companies, and created an environment that discouraged efforts to increase oil production in a country that depends on imports to meet over 85 per cent of its oil needs. The frequent review of the levies, it was argued, made the taxation unpredictable.

Lately, not much revenue was getting generated by the windfall gains tax. This is mainly due to significant softening in prices of crude oil and the three major fuels in the international market. The windfall gains tax mop-up was around Rs 25,000 crore in 2022-23 (FY23). It declined to around Rs 13,000 crore in FY24 and further to Rs 6,000 crore so far in FY25.

The provision to change the tax level, however, continued to be in place even as the levy itself was nil. With Monday’s move, the government has effectively withdrawn those provisions as well. This may be seen as an assurance to the country’s oil industry that the taxation regime will be predictable and stable.

The scrapping of the windfall gains tax may not have any notable impact on the financials of domestic oil producers like Oil and Natural Gas Corporation (ONGC) and Oil India (OIL), and major fuel exporters like Reliance Industries (RIL) and Nayara Energy (NEL). It does, however, have value as a signal of reliable and predictable taxation. It also signals that the Indian government is now confident in the view that a hard-to-manage surge in oil and fuel prices and supply shocks are unlikely going forward.