New Delhi: The government is considering a windfall tax on oil exploration and drilling companies such as ONGC, Oil India and Vedanta-run Cairn India as part of a plan to cushion consumers from rising crude prices.

The plan is to impose a cess on the income of these firms the moment prices cross $70 per barrel. Oil producers get paid international rates for the oil they produce from domestic fields. Under the plan, they would have to part with any revenue they earn if prices cross $70 per barrel.

The tax could be used in two ways - as a subsidy to fuel retailers for absorbing the hikes and not passing them on to consumers or compensation to the government if it cuts the excise duty.

Officials indicated that the windfall tax on oil producers was the most likely solution as the finance ministry was against cutting excise duties.

Around 18 per cent of the crude used by India is drilled domestically, but the price of this domestic crude is fixed in line with international prices.

Elections to the key states of Rajasthan and Madhya Pradesh are round the corner, while the general elections are slated for early 2019 even as there is a possibility it could be moved to the winter of 2018. The government needs to provide relief to consumers, complaining not only of higher crude prices but also significantly higher taxes.

Excise on both diesel and petrol has gone up nearly Rs 10 a litre between 2014 and 2018 and now stands at Rs 19.48 a litre on petrol and Rs 15.33 on diesel. At the same time, within the course of one year, crude prices have gone up to about $80 a barrel from $48 a year ago.

"The whole scheme is one of robbing Paul to pay Peter," said the director of a state-run exploration firm.

"After the deregulation of prices, this was the last thing we expected. The government is used to taxing this sector to make good shortfalls in its revenues and does not seem to be able to kick that habit."

However, finance ministry officials contended that "from an economist's standpoint, a windfall tax is seen as non-distortionary and pro-poor".

The ONGC share dropped Rs 7.70 to Rs 167.70 on the news of the possible cess, while the Oil India scrip plunged Rs 16.90 to Rs 214 on the BSE.

Finance ministry officials said states, too, would be asked to cut the sales tax, or VAT, on petroleum products. The BJP-ruled states may be nudged to take the lead on this.

A similar cess, like the windfall tax, was considered in 2008 when prices were on the rise. However, strident lobbying by oil firms, which then included Cairn India, stopped the government from taking such a step.

Globally, windfall tax is occasionally levied by some countries, including the UK and Australia. In 2011, the UK raised the tax rate on North Sea oil and gas profits when the price rose above $75 a barrel.

In Norway, companies drilling for North Sea oil pay 78 per cent tax rate on the income compared with a corporate tax rate of 28 per cent. Australia had similarly imposed a 22.5 per cent "super profits" tax on coal and iron ore producers after a boom in the prices of coal and iron ore earlier in this decade, which it later withdrew after protests.

Indications are that the windfall tax may continue for a substantial period of time or could be part of the government's long-term policy to deal with such situations in the future.