The Indian government has announced that the windfall tax on aviation turbine fuel (ATF), crude oil, petrol, and diesel, has been abolished, which is effective immediately. This move is aimed at providing relief to oil producers and refiners and marks the end of a levy introduced in July 2022.

Furthermore, by boosting their gross refining margins - a measure of profitability in refining crude oil, the decision is expected to benefit major oil players which include Reliance Industries and ONGC.

Adding to this, the government has also removed the Road and Infrastructure Cess (RIC) on petrol and diesel exports. This will further alleviate financial pressure on the oil sector.

So what is a windfall tax? It is an additional levy imposed on extraordinary or unexpected profits which are made by companies or industries.

Following a sharp rise in global crude oil prices, India had introduced the windfall tax on domestic crude oil production in July 2022. To note, the tax is aimed to capture excess revenue which is being generated from these unexpected gains.

The tax has been a subject of controversy since its implementation back in 2022. Industry players argued that it negatively impacted profitability and disincentivised production, while it initially sought to balance government revenue amid fluctuating oil prices.

To understand why the tax has been scrapped, we can consider a report by CNBC-TV18. So, according to the report, the decision to scrap the windfall tax followed a detailed review by the Prime Minister’s Office (PMO), coupled with the Revenue Department, and the Petroleum Ministry.

As the tax had become less effective in recent months due to global crude oil prices witnessing a decline which has reduced the revenue generated. Furthermore, this is further coupled with the Industry dissatisfaction over the windfall tax., wherein, the stakeholders contended that the levy discouraged higher production levels.

With the removal of this tax, it is expected to improve the financial performance of oil companies and potentially encourage higher production. Also to note, it also aligns with the government’s broader strategy to foster growth in the energy sector and drive exports.