The government has revised a windfall tax on domestically-produced crude oil. According to an official notification, the windfall tax rate of Rs 6,400 per tonne.

What is a Windfall Tax?

• Windfall taxes are 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 US Congressional Research Service (CRS) defines a windfall as an “unearned, unanticipated gain in income through no additional effort or expense”.
• One area where such taxes have routinely been discussed is oil markets, where price fluctuation leads to volatile or erratic profits for the industry.

Features of Windfall Tax

• Imposed on unanticipated and unearned gains: Windfall tax is imposed on the profits or gains that a company earns from external events or factors beyond their control, which they did not actively seek or pursue.
• One-time tax: It is typically imposed as a one-time tax retrospectively, over and above the normal rates of tax, and is not a regular or ongoing tax.
• Imposed on specific sectors or industries: Windfall taxes are usually imposed on specific sectors or industries where there is a significant increase in profits due to external factors such as price fluctuations, supply disruptions, or changes in regulations.
• Rationale for imposition: The imposition of windfall taxes is based on the rationale of redistributing unexpected gains, funding social welfare schemes, and creating a supplementary revenue stream for the government.
• Design problems: Introducing windfall taxes may suffer from design problems, given their expedient and political nature.
• Potential impact on investment: Windfall taxes may lead to uncertainty in the market and negatively impact future investment, as companies may feel uncertain about investing in a sector with an unstable tax regime.

When did India introduce this?

• In July 2022, 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.
• Also, India’s case was different from other countries, as it was still importing discounted Russian oil.

How is it levied?

• Governments typically levy this as a one-off tax retrospectively over and above the normal rates of tax.
• The Central government has introduced a windfall profit tax of ₹23,250 per tonne on domestic crude oil production, which was subsequently revised fortnightly four times so far.
• The latest revision was on August 31, when it was hiked to ₹13,300 per tonne from ₹13,000.

Reasons for re-introduction

• There have been varying rationales for governments worldwide to introduce windfall taxes like:

1. Redistribution of unexpected gains when high prices benefit producers at the expense of consumers,
2. Funding social welfare schemes, and
3. Supplementary revenue stream for the government

Issues with imposing such taxes

• Design problems: Windfall taxes may suffer from design problems, given their expedient and political nature. There is also the issue of determining what constitutes true windfall profits and who should be taxed, which raises questions about the threshold for exemption of smaller companies.
• Potential impact on investment: Windfall taxes may lead to uncertainty in the market and negatively impact future investment, as companies may feel uncertain about investing in a sector with an unstable tax regime.
• Internalization of potential taxes: Introducing a temporary windfall profit tax may reduce future investment since prospective investors may internalize the likelihood of potential taxes when making investment decisions.
• Threshold for exemption of smaller companies: Determining the threshold for exemption of smaller companies raises questions about which companies should be taxed and what level of profit is normal or excessive.
• Difficulty in determining true windfall profits: There is also the issue of determining what constitutes true windfall profits, as it may be challenging to differentiate between profits attributable to external events versus those attributable to a company’s active investment strategy or business expansion.

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