A windfall tax is a surtax imposed by governments on businesses or economic sectors that have benefited from economic expansion. The purpose is to redistribute excess profits in one area to raise funds for the greater social good; however, this can be a contentious ideal. Flexible Windfall Tax in India is a tax levied by governments against certain industries when economic conditions allow those industries to experience significantly above-average profits.
Quick Look
The idea of a flexible windfall tax in India has been discussed for several years now. This tax, which is designed to be levied on companies that make excessive profits due to changes in commodity prices, has the potential to generate significant revenue for the government while ensuring that companies don’t exploit natural resources for their benefit.
What Is a Windfall Tax?
A flexible windfall tax is a tax that’s designed to be levied on companies that make excessive profits due to sudden changes in commodity prices. For example, if the price of crude oil suddenly increases, oil companies may make huge profits as they continue to sell oil at the same price while their costs remain relatively stable. In such situations, a windfall tax can be levied on these companies to capture a part of these profits for the government.
The idea behind a flexible windfall tax is to prevent companies from exploiting natural resources for their benefit and to ensure that a fair share of the profits generated from these resources goes to the government.
A windfall tax is a tax levied by governments against certain industries when economic conditions allow those industries to experience significantly above-average profits. 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.
Why is a Flexible Windfall Tax needed in India?
India is a resource-rich country, with significant reserves of coal, oil, and other minerals. However, the exploitation of these resources has often been done at the expense of the environment and the local population. Additionally, companies have often made excessive profits from these resources, without sharing a fair proportion of the profits with the government.
A flexible windfall tax is needed in India to ensure that the profits generated from the exploitation of natural resources are shared fairly between companies and the government. This tax can also act as a deterrent for companies to exploit resources excessively, as they’ll have to share a part of the profits with the government.
Who needs to pay a Windfall Tax?
Companies and industrial sectors that can be subject to windfall taxes are those with massive increases in profits, generally due to situations such as wartime, commodities shortages, and other situations and events that drive up prices. Individuals may also be taxed on windfalls, such as those from inheritances or lottery winnings.
The implementation of a flexible windfall tax in India will require a clear policy framework that defines the threshold for excess profits and the rate of tax that’ll be levied. The tax can be designed in a way that ensures that it’s not overly burdensome for companies that are genuinely impacted by changes in commodity prices while ensuring that companies that make excessive profits are appropriately taxed.
The implementation of a flexible windfall tax will also require the government to have a robust system for monitoring and reporting of profits. This will ensure that companies don’t evade taxes by artificially reducing their profits.
Who Benefits from Revenue Raised by Windfall Taxes?
Taxes are imposed by governments and can be used for a variety of purposes. During World War I and World War II, windfall profit tax revenue went to support the war effort. The 1980 taxes added to general government funds. Revenue from the new EU Council 2022 tax is to be used to provide financial support to households and companies and to mitigate the effects of high retail electricity prices.
Advantages and Disadvantages of the Windfall Tax
The windfall tax is hiked to make the companies that enjoyed a sudden increase in profit pay a fair share of their money. It will help the Government overcome losses from the recent financial crisis. This crisis is affecting the Indian economy, and Government need to compensate for that. The Government has planned a windfall tax hike to recover its losses.
This tax will encourage Indian oil companies to put the money they made back into the company. This reinvestment could be in the form of job creation, environmental projects, or infrastructural development. The windfall tax will ensure businesses reinvest their profits to foster innovation, which would ultimately benefit society as a whole.
Windfall Tax Impact on Crude Oil, ONGC & Oil Companies in India
As discussed earlier, crude oil prices soared high due to the prevailing war conditions in Russia and Ukraine. Resultantly, the oil companies in India made extraordinary profits marking all-time high net gains during the fiscal year 2022. GAIL, Oil India, and ONGC are among the highest revenue collectors.
The Government imposed this windfall tax on oil producers to make up India’s trade deficit and increase expenditure on food and fertilisers. The proposal to impose this tax was made in July 2022 and came into effect on 1 September 2022.
The Government increased excise duty on diesel exports from Rs.6 to Rs.12 per litre. They also revised the aviation turbine fuel export cess and increased export duties on petrol and diesel by Rs.6 per litre and Rs.13 per litre, respectively.
However, this tax was brought down and revised, given the oil prices in the international market came down by mid-July. Furthermore, Government revised it again on 2 August 2022, and this time they reduced and increased the taxes on different fields.
Finally, on 19 August 2022, diesel export taxes increased by Rs.7 per litre. Tax on ATF was brought back to Rs.2 per litre. Government reduced the tax on domestic crude oil to Rs. 13,330 per tonne.
Flexible Windfall Tax
In India, before July 2017, excise duty was levied by the Central Government on excisable goods which were produced or manufactured in India. There were three types of excise duties in India
- Basic Excise Duty, which was levied on all excisable goods apart from salt, manufactured or produced in India
- Additional Excise Duty, which was levied on certain goods of special importance under Additional Duties of Excise (Goods of Special Importance) Act, 1957
- Special Excise Duty, which was levied on special goods classified under the Second Schedule to the Central Excise Tariff Act, 1985.
It appears that the sense for introducing windfall taxes by worldwide Government is to mitigate the impact of mismatch in demand and supply in their domestic market leading to inflation, trade deficit etc to generate additional source of income and bridge the gap in Government’s spending and revenue; to fund social welfare schemes of Government. In Sep 2022, the Government has clarified that crude oil prices have witnessed extreme volatility in 2022 Windfall tax is one of the measures which helps in dealing with the situation.
Since July 2022, the Government has curtailed windfall tax rates by 91% to Rs.2100 per tonne on petroleum crude, 25% to Rs.4.5 per litre on aviation turbine fuel, 42% to Rs.7.5 per litre on diesel, however it is nowhere defined at what levels of unanticipated profits this windfall tax is applicable. Well, till the time Government is having this additional revenue, this flexible windfall tax will continue to be wax and wane depending on market conditions.
Conclusion
A flexible windfall tax is a necessary policy tool that can ensure that the profits generated from the exploitation of natural resources are shared fairly between companies and the government. The implementation of this tax in India will require a clear policy framework, robust monitoring and reporting systems, and a willingness from the government to ensure that companies don’t exploit natural resources excessively. With the right policies in place, a flexible windfall tax can generate significant revenue for the government while ensuring that natural resources are used sustainably.
