From UPSC perspective, the following things are important :
Prelims level : Windfall taxes
Mains level : Read the attached story
The government raised the windfall tax on domestically-produced crude oil by more than a third while doubling the rate on export of diesel and reintroducing the levy on export of jet fuel (ATF) in line with the rise in international oil prices.
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.
When did India introduce this?
- In July this year, 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.
Why govt. introduced windfall tax?
- There have been varying rationales for governments worldwide to introduce windfall taxes like:
- Redistribution of unexpected gains when high prices benefit producers at the expense of consumers,
- Funding social welfare schemes, and
- Supplementary revenue stream for the government
Why are countries levying windfall taxes now?
- Prices of oil, gas, and coal have seen sharp increases since last year and in the first two quarters of the current year, although they have reduced recently.
- 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.
- Since the gains stemmed partly from external change, multiple analysts have called them windfall profits.
Issues with imposing such taxes
- Companies are confident in investing in a sector if there is certainty and stability in a tax regime.
- Since windfall taxes are imposed retrospectively and are often influenced by unexpected events, they can brew uncertainty in the market about future taxes.
- IMF says that taxes in response to price surges may suffer from design problems—given their expedient and political nature.
- It added that introducing a temporary windfall profit tax reduces future investment because prospective investors will internalise the likelihood of potential taxes when making investment decisions.
- There is another argument about what exactly constitutes true windfall profits; how can it 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— raising the question of whether producers with revenues or profits below a certain threshold should be exempt.