TAXING WINDFALL PROFITS
1. Context
Recently, the Union government hiked the windfall profit tax levied on domestically-produced crude oil as well as on the export of diesel and aviation turbine fuel (ATF). Just three days before this, the Chairman of the Central Board of Indirect Taxes & Customs Vivek Johri told PTI that prices of crude were on the rise again and thus, for the time being, windfall tax will continue.
2. About Windfall tax
- The U.S. Congressional Research Service (CRS) defines a windfall as an "unearned, unanticipated gain in income through no additional effort or expense".
- They are called so as the profits are derived from an external or unprecedented event or from something the firm actively did not participate in, for instance, the energy price rise as a result of the Russia- Ukraine conflict.
- Typically, it's levied as a one-off tax retrospectively over and above the normal rates of tax.
- In oil markets, price fluctuations lead to volatile or erratic profits for the industry. Hence, tax is levied to redistribute unexpected gains when high prices benefit producers at the expense of consumers.
- It can be used to fund social welfare schemes, and as a supplementary revenue stream for the government.
3. Need for Windfall Tax?
- To narrow the country's widened trade deficit on account of rising prices of oil, gas, and coal rise in prices due to pandemic recovery and supply issues resulting from the Russia-Ukraine conflict and consequent increase in energy demands.
- The rising prices imply huge profits for energy companies while resulting in hefty gas and electricity bills for households-widening income inequality.
- The "grotesque greed" of big oil and gas companies eg. the largest energy companies in the first quarter of the year made combined profits of close to $100 billion.
4. Windfall Profits
- ‘Windfall profits’ refer to an unanticipated spike in earnings of an entity resulting from an exogenous event (which could be one-off and/or prolonged) and not resulting from a business decision.
- The B.K. Chaturvedi committee’s report on the Financial Position of Oil Companies (2008) stated that taxing these windfall gains has been seen as a prerogative of governments, partly to meet fiscal needs and to pursue redistributive justice.
- The central idea here is for sovereigns to capitalize on the lofty profits made by the entities and use them for specific domestic pursuits, for example, spur collections (of taxes) to guard against the consequences of a larger geopolitical event or redistribute them for it to be used for domestic social service schemes, among other reasons.
5. What led to windfall gains?
- Russia’s actions in Ukraine were central to the volatility observed in the oil market in the previous calendar year.
- For perspective, Russia was among the major players in the global oil market and among the largest producers alongside Saudi Arabia and the U.S.
- As a response to Russia’s actions, several Western countries moved to stop or curtail their energy imports from Russia.
- This led to sharp increases in fossil fuel prices as sovereigns went to look for other suppliers for their energy needs, culminating in major profits for oil companies.
- This was a total reversal of fortunes compared to the onset of the pandemic when oil had struggled to even attain fiscal breakeven.
- In India, ONGC's profit after tax (PAT) until September end of the ongoing fiscal year stood at 28,032 crores, compared to the 40,306 crores in the complete fiscal ending March 31, 2022.
- The turn of events has led to oil companies prioritizing investments in conventional sources to provide energy security than transitioning towards cleaner energy to meet energy requirements.
6. Criticism against imposing Windfall Tax
- The one-off taxes, which by definition are imposed retrospectively, are seen as arbitrary, fueling uncertainty among businesses about future taxes.
- The imposition of windfall tax is branded as anti-investment and anti-business.
For Prelims
| For Prelims: Aviation turbine fuel (ATF), Windfall Tax, Central Board of Indirect Taxes, Congressional Research Service (CRS), Russia- Ukraine conflict, B.K. Chaturvedi committee’s report on the Financial Position of Oil Companies (2008), Profit after tax (PAT). |
Source: The Hindu
