What is a Windfall Tax on Crude Oil. It’s affect on companies and government?

What is a Windfall Tax on Crude Oil. It's affect on companies and government?
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What Is A Windfall Tax?.

Governments levy windfall taxes on specific businesses when the economy allows such industries to generate profits that are above average. Windfall taxes are mostly applied to businesses in the targeted industry that have gained the most from the windfall; these are frequently commodity-based enterprises.

The invasion of Ukraine by Russia has caused crude oil prices to reach new highs, and there has been talking in the markets about imposing a one-time “windfall tax” on Crude Oil and gas businesses. According to the argument, energy companies should temporarily pay a tax to support the government’s budget because they have benefited from high Crude Oil prices. Many European countries have previously implemented or are contemplating implementing a windfall tax.

How Windfall Taxes Work

There is always a split between those who support and those who oppose a tax, as there is with any tax plan that the government introduces. One of the advantages of a windfall tax is that government spending on social programs will be increased as a direct result of the tax’s revenue. Windfall taxes, meanwhile, are opposed because they believe they discourage businesses from pursuing profitable strategies. Furthermore, they think that businesses should reinvest their profits in order to foster innovation, which would ultimately benefit society as a whole.

Profitable company shareholders and the rest of society will continue to disagree on the controversial topic of windfall taxes. This problem reached a boiling point in 2005 when oil and gas firms, including Exxon Mobil, which declared earnings of $36 billion for the year, had extraordinarily high profits as a result of increased energy prices.

Although the purpose of taxing windfall gains is to motivate the taxed corporations to cut their prices for the benefit of customers, this may have the unintended consequence of limiting investment because the after-tax return may not be worthwhile.

How Will It Impact Companies?

The cess of Rs 23,250 per ton on domestic crude oil imposed on the corporations will have an adverse effect on their profit margins. The windfall tax would only be reduced, according to Revenue Secretary Tarun Bajaj, who spoke to Reuters on Friday, if crude prices declined by $40 per barrel from where they are now.
Following a gain of 2.4% on Friday, the September Brent crude futures contract fell 36 cents, or 0.3%, to $111.27 per barrel

that ONGC and OIL India paying a higher cess on domestic crude production of $40 per barrel was a bad surprise and should suggest adverse concerns for the sector. It reduces the FY23 earnings of ONGC and OIL India by 36% and 24%, respectively. Global trends in taxes, regulations, and windfall taxes on oil producers show a tighter prognosis for the energy sector.
However, this cess won’t have any negative effects at all on the prices of domestic petroleum products or fuel. Small producers who produced less than 2 million barrels of crude annually in the previous fiscal year will also not be subject to this tax.

Additionally, no cess will be levied on the amount of crude that is produced by a crude producer over what was produced the year prior in order to encourage increased production over the previous year. The cost of crude oil, petroleum products, or fuels would not be affected by this legislation.

How Much The Government Is Likely To Earn?

According to a PTI report citing sources, the tax on crude oil producers like Oil and Natural Gas Corporation, Oil India Ltd, and Vedanta alone will bring in Rs 69,000 crore per year, considering 29.7 million tonnes of oil production in the 2021–22 fiscal year (April 2021–March 2022).

If the tax is in force till March 31, 2023, it will bring in over Rs 52,000 crore for the government for the remaining nine months of the current fiscal year. Additionally, the increased tax imposed on the export of gasoline, diesel, and ATF would generate more money.

The government has also imposed a cess amounting to Rs. 6 per liter on gasoline and Rs. 13 per liter on diesel in addition to the windfall tax on crude oil.

The levy, which might be imposed when oil prices, for example, reach a specific level, will help the government raise money and support initiatives to shield vulnerable groups from escalating inflation.

Simply put, a windfall tax is a charge placed on businesses whose financial performance has been improved solely by luck or unavoidable circumstances. For instance, the global surge in energy costs brought on by Russia’s invasion of Ukraine has benefited energy businesses.

The UK announced a 25% windfall tax on oil and gas company earnings on Thursday.

India has already thought about implementing a windfall tax. In 2008, when oil prices were at an all-time high and many Indian oil companies were making a fortune, policymakers also toyed with the concept. Both times, the plan was shelved after facing vehement opposition from private oil companies (which account for a sliver of the business in India that is dominated by state-owned firms).

Because refiners, particularly those in the private sector, were exporting gasoline and diesel for windfall profits rather than servicing the domestic market, the government enacted special additional excise duties and cesses on those exports.

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