China has imposed a windfall tax on domestic oil producers designed to help the government offset the cost of new subsidies for farmers, fishermen and other groups hurt by rising oil product prices.

Beijing on Sunday announced its first increase in domestic oil product prices in eight months, seeking to narrow the gulf between them and the high international cost of crude.

Chinese officials had previously hesitated to pass on oil price rises to the nation’s pumps out of concern over the impact on already hard-pressed farmers and vocal urban interest groups such as taxi drivers.

In raising oil product prices, the National Development and Reform Commission stressed that the State Council, China’s cabinet, would move to compensate “disadvantaged groups and public-good industries”.

“In accordance with the State Council decision, a special profit levy will be made on sales of domestic crude by oil extraction companies from the date of the price adjustment,” the NDRC said.

The commission gave no details of the windfall tax, making it impossible to judge the likely impact on profits of PetroChina, Sinopec and CNOOC, state-controlled but overseas-listed Chinese majors.

Specifics of both the levy and new subsidies system would be announced by the finance ministry, the NDRC said.

The tax highlights the challenges the government faces in addressing market distortions created by its tight control on domestic oil product prices despite increasing reliance on imports of crude.

Oil producers have seen their profits soar amid rising crude prices, but China’s refining sector lost a reported Rmb30bn ($3.7bn, €3bn, £2bn) last year.

The government gave Sinopec, China’s biggest refiner, a windfall compensation payment of Rmb9.42bn at the end of last year to compensate for its refining losses. By taxing producers’ profits, Beijing should find it easier to finance subsidies, although the new system could prove difficult to implement effectively.

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