Windfall Tax on Oil & Gas, Meaning, Issues

Windfall Tax Meaning

• Windfall Tax are taxes imposed on the profits a company makes from an external, sometimes unprecedented event.
• Windfall Tax is defined by the United States Congressional Research Service (CRS) as an “unearned, unanticipated gain in income through no additional effort or expense”.
• These profits are not because of something the firm actively did, like an investment strategy or an expansion of business.
• Windfall Taxes are primarily levied on companies in the targeted industry that have benefited the most from the economic windfall, most often commodity-based businesses.
• The purpose is to redistribute excess profits in one area for the greater social good.
• Imposed on: One area where such taxes have routinely been levied is oil markets, where price fluctuation leads to high profits for the industry.
• Reasons for levying Windfall Tax: These taxes are levied to fund social welfare schemes, and as a supplementary revenue stream for the government.

Windfall Tax: Recent Developments in India

• The Central government had introduced a windfall profit tax of Rs 23,250 per tonne on domestic crude oil production, from July 1, 2022. The latest revision was on August 31.
• India has also imposed additional excise levy on diesel, petrol and air turbine fuel (ATF) exports.
• Objective: The reason behind the tax was to control the “phenomenal profits” made by some oil refiners who decided to export fuel to reap the benefits of skyrocketing global prices while affecting domestic supplies.

Windfall Tax: Why Levy Now?

• Rise in energy prices: The demand and supply mismatch has resulted in consistent rise in energy bills. Energy companies are witnessing record profits.
• Subsidize poor households: The governments across the world have been planning to tax excessive profits and use the funds to support the most vulnerable people through these difficult times.
• Recommendation from international bodies: The UN chief has recommended countries to impose taxes on excessive profits. The IMF has supported the move and released advice as to how such a tax should be levied.
• Narrow trade deficit: Countries such as India feel that taxes collected from oil and energy companies can bridge the widening trade deficit.

Windfall Tax: Around the World

Windfall Tax: Issues

• Uncertainty in markets: Retrospectively imposed taxes create uncertainty in the market about future taxes. Companies prefer stability in tax regime.
• Affect future investments: Potential investors will be careful of such taxes in future before making investments.
• Lack of clarity: There is no clarity about what constitutes true windfall profits and how can it be determined what level of profit is normal or excessive.
• Taxable entity: There is no clarity on whether the big companies responsible for the bulk of high-priced sales should be taxed or the smaller companies as well.

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