Daily Current Affairs : 5-December-2024

The Government of India recently decided to withdraw the windfall gains tax, a decision that has significant implications for the oil industry and the broader economy. This move comes after more than a year of the tax being in place, which was initially introduced to address the impact of soaring global oil prices.

What is the Windfall Gains Tax?

The windfall gains tax was introduced in July 2022, following the sharp rise in global oil prices, particularly after Russia’s invasion of Ukraine. The primary aim of the tax was to capture the “super-normal” profits earned by oil producers and exporters during periods of high global oil prices. It targeted products such as:

  • Domestic crude oil
  • Diesel
  • Petrol
  • Aviation Turbine Fuel (ATF)

This tax was levied as Special Additional Excise Duty (SAED) and Additional Excise Duty (AED), rather than being covered under the Goods and Services Tax (GST).

India's Withdrawal of Windfall Gains Tax: What You Should Know
Courtesy : The Economic Times
Purpose of the Windfall Gains Tax

The main goals of the windfall gains tax were twofold:

  1. To prevent export-induced shortages of fuel in India, ensuring enough supply for domestic consumption.
  2. To generate government revenue by capturing excess profits from oil producers during times of high global crude prices.
Positive Impacts on the Indian Economy

The windfall tax did have some positive outcomes:

  • Revenue Generation: The tax helped the government generate about ₹25,000 crore in FY23, which provided a cushion against revenue losses from domestic fuel duty cuts.
  • Stable Fuel Supply: By discouraging excessive exports, the tax played a role in ensuring a stable supply of fuel in India during a period of global energy disruption.
Negative Impacts on the Indian Economy

Despite its positive aspects, the windfall gains tax also had certain drawbacks:

  • Discouraging Private Refiners: The tax discouraged private refiners from boosting production, as it impacted their profitability.
  • Unpredictable Tax Regime: The frequent changes in the tax structure created an unpredictable environment, affecting investor sentiment and business planning in the oil sector.
Important Points:

Products Covered:

  • Domestic crude oil, diesel, petrol, and aviation turbine fuel (ATF).

Tax Structure:

  • Levied as Special Additional Excise Duty (SAED) and Additional Excise Duty (AED), not under GST.

Purpose of the Tax:

  • Prevent export-induced shortages of fuel in India.
  • Capture excess profits for government revenue.

Positive Impacts:

  • Generated ₹25,000 crore in FY23, offsetting domestic fuel duty cuts.
  • Helped ensure a stable supply of fuel during global energy disruptions.

Negative Impacts:

  • Discouraged private refiners from increasing production.
  • Created an unpredictable tax environment, affecting investor sentiment.

Withdrawal of the Tax:

  • The Indian government recently decided to withdraw the windfall gains tax to foster growth in the oil sector and manage economic challenges.
Why In News

The Government of India recently withdrew the windfall gains tax on domestic crude oil production and exports of diesel, petrol, and aviation turbine fuel (ATF), signaling a shift in policy aimed at encouraging growth in the oil sector and stabilizing the domestic fuel market.

MCQs about India’s Withdrawal of Windfall Gains Tax
  1. When was the windfall gains tax introduced in India?
    A. January 2021
    B. July 2022
    C. March 2023
    D. June 2022
    Correct Answer: B. July 2022
    Explanation: The windfall gains tax was introduced in July 2022 to capture the super-normal profits made by oil producers and exporters during the surge in global oil prices, particularly after the Russia-Ukraine conflict.
  2. Which of the following products was not covered under the windfall gains tax?
    A. Diesel
    B. Petrol
    C. Natural Gas
    D. Aviation Turbine Fuel (ATF)
    Correct Answer: C. Natural Gas
    Explanation: The windfall gains tax applied to domestic crude oil, diesel, petrol, and aviation turbine fuel (ATF), but did not include natural gas.
  3. What was the primary aim of imposing the windfall gains tax in India?
    A. To increase the price of crude oil
    B. To capture super-normal profits and generate government revenue
    C. To encourage more oil imports
    D. To reduce fuel production in India
    Correct Answer: B. To capture super-normal profits and generate government revenue
    Explanation: The primary aim of the windfall gains tax was to capture excess profits earned by oil producers during periods of high global crude prices, and to generate revenue for the government.
  4. What was a negative impact of the windfall gains tax on the Indian economy?
    A. It led to an increase in fuel exports
    B. It discouraged private refiners from boosting production
    C. It reduced the government’s revenue
    D. It decreased the domestic supply of fuel
    Correct Answer: B. It discouraged private refiners from boosting production
    Explanation: The imposition of the windfall gains tax discouraged private refiners from increasing production, as it affected their profitability. This was one of the negative impacts of the tax.

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