WINDFALL TAX
1. Context
The central government on July 1 introduced a windfall profit tax on domestic crude oil production Finance Minister defended the windfall tax imposed by the centre on domestic crude oil producers.
2.Windfall tax
- It is designed to tax the profits a company derives from an external, sometimes unprecedented event-for instance, the energy price rise as a result of the Russia –Ukraine conflict.
- These are profits that cannot be attributed to something the firm actively did, like an investment strategy or an expansion of business.
- The U.S Congressional Research Services (CRS)defines a windfall as an unearned, unanticipated gain in income through no additional effort or expense.
- Government typically levies this as a one-off tax retrospectively over and above the normal rates of tax.
- Finance Minister explained the introduction of the windfall tax as a way to rein in the “phenomenal profits" made by some oil refineries who chose to export fuel to reap the benefits of skyrocketing global prices which affected domestic supplies.
3.Rationale behind tax
- Pandemic recovery and supply issues resulting from the Russia –Ukraine conflict shored up energy demands, which in turn have driven up global prices.
- The rising prices meant huge and record profits for energy companies while resulting in hefty gas and electricity bills for households in major and smaller economies.
- The UN chief urged all governments to tax these excessive profits and use the funds to support the most vulnerable people through these difficult times.
4.Windfall tax in India
- In July, India announced a windfall tax on domestic crude oil producers who it believed were reaping the benefits of the high oil prices.
- It also imposed an additional excise levy on diesel, petrol, and air turbine fuel (ATF) exports.
- India's case was different from other countries, as it was still importing discounted Russian oil.
| Windfall tax was targeted mainly at Reliance Industries ltd and Russian Oil major Rosneft –backed Nayara Energy, who the government believed were making a killing on exporting large volumes of fuel made from discounted Russian oil at the cost of the domestic market. |
5.Purpose tax
5.1.Reducing trade deficit
Analysts also saw the windfall tax as a way for the centre to narrow the country's widened trade deficit.
5.2.Funding welfare schemes
It will also be led to the redistribution of unexpected gains when high prices benefit producers at the expense of consumers, to funding social welfare schemes, and as a supplementary revenue stream for the government.
6.Issues in imposing tax
- Since windfall taxes are imposed retrospectively and are often influenced by unexpected events, they can brew uncertainties in the market about future taxes.
- German economist Andreas Peichl said that such taxes are populist and politically opportune in the short term.
- IMF said that taxes in response to price surges may suffer from design problems given their expedient and political nature.
- It will reduce future investment because prospective investors will internalize the likelihood of potential taxes when making investment decisions.
- There is another argument about what exactly constitutes true windfall profits, how it can be determined, and what level of profit is normal or excessive.
| Another issue is who should be taxed only the big companies responsible for the bulk of high-priced sales or smaller companies as well as raising the question of whether producers with revenues or profits below a certain threshold should be exempt. |
For Prelims & Mains
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For Prelims: Windfall tax, crude oil
For Mains: what is windfall tax and why reasons for imposing it in India. (250 words).
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