Will Centre share windfall tax gains with states? FM explains

Finance minister Nirmala Sitharaman has said while the Centre does not devolve cesses to states, various cesses are used to fund centrally-sponsored schemes only, whereby funds are transferred to states to implement these schemes. The government last month had imposed a windfall tax on domestic oil producers and refiners as they were making "super normal profits" amid a sharp rise in global crude prices.

The Centre imposed the duties on domestically produced crude petroleum and the export of petrol, diesel and aviation turbine fuel on July 1, 2022.

The finance minister, replying to a question in the Lok Sabha today, says diesel, petrol and ATF (aviation turbine fuel) prices rose even more sharply, which led to "extraordinary cracking margins" on the exports of these products. Petroleum crude attracted duty worth ₹23,500 per tonne; petrol (exports) ₹6 per litre; diesel(exports) ₹13 per litre and ATF ₹6 per litre.

"The domestic producers of petroleum crude like ONGC sell their crude at international parity price. As international crude prices rose sharply, these crude producers were making super normal profits," says the FM, adding that extra levies are reviewed periodically, while taking into account all relevant factors, including international prices.

Since the levies are revised almost fortnightly, the duties were revised on July 20 and again on August 3. While export duty on petrol and aviation turbine fuel now stands at zero, the extra levy on petroleum crude has reduced to ₹17,750 per tonne. It was increased by ₹750 per litre on August 3, 2022, after the ministry cut it down to ₹17,000 per tonne on July 20. The diesel export also attracts a ₹5 per litre duty.

On sharing the windfall tax gains with states, the FM says while the cesses are not devolved to the states, the various cesses collected by the central government are primarily used for funding various centrally sponsored schemes.

"(so) Funds are transferred to the states for implementing these schemes and thus are used for development expenditure by the states," she says.

The international crude oil prices, meanwhile, are near a multi-month low amid a negative global economic outlook. Brent crude futures were trading 0.5% down at $94.41 a barrel on Monday, while U.S. West Texas Intermediate crude was down 0.5% at $88.58 per barrel.

In the recent months, crude prices have risen sharply. Domestic crude oil producers, who sell crude to local refineries at international parity prices, were, therefore, making windfall gains. The Centre then introduced these levies to tap into their profits. Small producers, whose annual production of crude in the preceding financial year is less than 2 million barrels, were exempted from this cess.

All in all, these measures were supposed to compensate for the excise duty cut on fuel, which was announced in May. These measures were also supposed to ease pressure on the current account deficit in the backdrop of the rising imports bill and cash in on the super normal profits of energy companies.

The government’s Economic Survey for 2021-22 had assumed crude oil prices to be in the range of $70 to $75 per barrel. A huge rise in crude oil prices in recent months raised worries on the widening of the current account deficit (CAD).

Crude oil price is one of the many factors including exports and imports, which can increase the CAD. Taking into account, the Centre had recently increased customs duty on gold from 10.75% to 15% to restrain gold imports that are likely to reduce CAD. Further, the RBI also announced a series of measures to increase foreign exchange inflows to finance the current account deficit.