Fuel price: What is windfall gain tax and how it affects fuel prices?

What is windfall gain tax? How does it impact petrol-diesel prices? Which countries impose it? Read this detailed article to know everything about fuel and its relation to windfall gain tax

According to a CNBC report, the Indian government will once again slash windfall gain tax in the upcoming fortnightly review. Since the oil prices are in a relatively stable state, there would be no motive for slashing taxes from the corporations.

The windfall tax on crude oil is Rs 17,000 per tonne which was earlier Rs 17,750 per tonne. The export duty on diesel was also slashed from Rs 11 per litre to Rs 5 per litre in the second review. Besides, there is no export duty on petrol and aviation turbine fuel(ATF).

Also read| Govt cuts windfall tax on fuel export, raises levy on domestic crude oil

What is windfall gain tax?

A windfall gain tax is imposed by the government on a company. When a corporate gains from something that it can't control or are responsible for, that financial gain is windfall profits.

After the reduction in the central excise duty and more expenses on fertilizer and food, the government's expenditure got increased. As a result, the government imposed a windfall tax on oil companies to compensate for the gap.

In simpler words, a windfall gain tax is a higher tax rate on gains that result from a sudden windfall gain to a particular organization or industry, usually as an aftermath of geo-political disturbance, natural disaster or war that creates uncommon spikes in demand or supply interruptions. Ukraine and Russia conflict is a prime example.

Why does government levies the windfall gain tax?

The Windfall gain tax counts to the government's income. In May 2022, the government of India slashed the excise duty of Rs 8 and Rs 6 per litre of petrol and diesel, respectively to control inflation.

According to the Press Trust of India, the windfall tax on crude production was gauged to generate Rs 650 billion in revenue and a tax of Rs 527 billion if implemented for a full year.

Hence, the revenue from windfall taxes can help the government make up for the losses.

Which countries impose windfall gain tax?

India is not the only country that imposed windfall tax on oil corporations.

United Kingdom's Leadership Candidate, Rishi Sunak also imposed a windfall tax on oil and gas firms, when he was a Finance Minister.

“The oil and gas sector is making extraordinary profits not as the result of recent changes to risk-taking or innovation or efficiency but as the result of surging global commodity prices driven in part by Russia’s war,” Rishi briefed lawmakers in the House of Commons.

Italy is another nation that levied windfall gain tax in May. The country announced 25 per cent taxes on energy companies to support consumers and businesses that were affected by high fuel prices.

How does windfall gain tax effects fuel prices?

Windfall gain tax was imposed when the companies were charging unrealistically high-petrol prices during the Russia-Ukraine conflict. So, the windfall gain tax's main objective is to bring down the available cost of goods and services so that it benefits the end customer. 

But, fuel prices have declined after the imposition of $15 per barrel, which means windfall gains are not needed. So, the companies will try to get a review of the government-imposed tax.


(Written by Zuhair Zaidi)