Fuel taxes will come to the government’s rescue yet again. If last year saw consumers bearing the burden of excise duty hikes, the tax axe fell on producers this time. On Friday, the Centre imposed new levies of Rs 6 per litre on petrol and Air Turbine Fuel and Rs 13 per litre on diesel exports by firms like Reliance Industries Ltd. Besides, it also introduced a windfall tax of Rs 23,230 per tonne on crude oil produced locally by companies like ONGC and Vedanta, taking away a slice of their supernormal profits on account of high crude prices. The refiners reportedly processed Russian crude oil available at a discount and exported it to Europe and the US. As if this was not enough, some were even emptying domestic pumps to enable the exports, leading to fuel shortages in several states. An understandably browned-off government thus responded with a round of levies.
The decision follows similar moves by countries like the UK that are taxing the extraordinarily ‘war-fueled profits’ of energy firms. A windfall tax goes after excessive profits earned purely on account of external factors. They are despised by the industry and are seen as arbitrary, selective and unfair. For instance, the big tech got away with their pandemic riches even as companies like Apple and Amazon were awash with cash as lockdown-induced consumption shot up. The other argument is that if crude prices collapse, oil companies could as well queue up for a one-off subsidy.
While the debate is unsettled, the windfall tax alone will fetch the government Rs 67,425 crore, offsetting fuel, food and fertiliser subsidies. The good news is, unlike the UK’s one-year levy, ours is not time-bound, which means it could be rolled back when crude prices calm down. Also, to incentivise production, no cess is imposed on crude produced more than last year, but with earnings squeezed, producers’ ability to raise production gets affected. Nearly 90% of the total crude oil processed is imported and despite efforts, domestic production has not kept up. The government should bear this in mind.