Tarun Kapoor, Prime Minister Narendra Modi's advisor, said on Wednesday that the finance ministry will decide whether to eliminate the windfall tax on domestic crude oil extraction.

The windfall tax on crude oil was implemented in 2022 to counteract excessive profits made during periods of high prices. Kapoor stated that because global oil prices have considerably dropped, the tax may no longer be necessary.

"The finance ministry will take a view. I think the petroleum ministry has already written to them," says Kapoor.

What is the windfall tax on crude, and why was it implemented?

On July 1, 2022, the Centre imposed a windfall tax on domestically produced crude oil in reaction to increased world prices caused by uncertainty. Finance Minister Nirmala Sitharaman indicated that the decision was intended to reduce phenomenal profits earned by some oil refiners who exported fuel at the expense of domestic suppliers. At the same time, the Centre imposed an extra tax on refined products such as gasoline, diesel, and aviation fuel.

Following the fortnightly review, the central government reduced the windfall tax on domestically produced crude oil to zero on September 17. This tax, known as a Special Additional Excise Duty (SAED), is adjusted every two weeks based on the average oil price for that period. Effective September 18, the tax on diesel, petrol, and jet fuel, generally known as aviation turbine fuel (ATF), remained nil.

Why are oil prices lowering?

Expectations of additional drops in oil prices derive from a negative demand outlook in China and the United States, as well as the belief that tensions in West Asia may be handled.

According to JP Morgan, crude oil prices could fall into the low $60s by the end of 2025. Prices originally rose owing to Russia's invasion of Ukraine, with worldwide benchmark Brent reaching $139.13 per barrel, the most since 2008.

Tensions in West Asia, notably those involving Israel and other regional countries, have prompted oil prices to rise to about $81 per barrel in early October, up from $71 in late September.

Analysts at Rabobank International estimate that markets will be oversupplied by approximately 700,000 barrels per day (bpd) in 2025.