Axe the oil windfall tax: It’s outlived its rationale

livemint.com:

₹4,250 per tonne from ₹1,600, while diesel now faces a levy of ₹1 per litre (as against nil earlier), according to a new government notification. As crude oil prices—which have hit a three-month high—look set to boost the profits of Indian refiners again, the Centre seems keen to get its pound of flesh. The question, though, is whether the levy should exist at all.

When it was imposed on India’s oil sector in mid-2022, soon after the Russia-Ukraine war broke out, it was justifiable as a one-off in aid of a fiscal recovery from a pandemic overstretch. The war’s disruption of oil supplies had sent prices soaring and yielded oil businesses a bounty. As these extra profits arose from an externality rather than any strategy, it made sense for windfall makers to part with some of it to public coffers.

This levy was popular in many countries around the world that had their finances left in bad shape by covid. But even though the war’s oil-shock is now in the past and our economic recovery has held its momentum, the tax persists—with on-and-off charges on various items reset every fortnight. Indeed, with multiple tweaks over the past year, it exemplifies tax variability at its worst.

Given how the global oil market has been shaping up, crude trading in a range of $80-85 per barrel these days—well below early war levels—should be taken as a sign of normalcy. The recent rally can be traced to Saudi Arabia’s effort to constrain supply in attempted price support, but it has been too weak for policy attention. Nevertheless, a domestic system of fortnightly tax reviews has acquired an unfortunate air of permanence as a device to squeeze the sector for revenues.