Windfall Tax
Windfall Tax was introduced in the 1970s with the sole intention of taxing businesses making high profits. The word ‘Windfall’ here means a sudden surge in the profits that a company or business may experience. The windfall tax is the tax levied on those profits.
What is Windfall Tax?
Windfall Tax is a one-time tax that is imposed on entities that have made huge profits due to favorable market conditions. The Government of India impose this tax so that in return they can increase their own revenue.
However, it must be noted that the Government can only levy the windfall tax if a company experiences a sudden surge in profits due to external reasons. If a company earns profits due to a planned strategy, then no windfall tax can be levied.
How is Windfall Tax Calculated?
Windfall Tax is levied only if a company makes profit due to any external event where no strategy was involved. For example, if a company made sudden profit due to the outbreak of covid, or the war between Russia and Ukraine helped a business entity earn significant profit, then it will be taxed by the Government.
Impact of Windfall Tax on Crude Oil Companies
One of the examples through which we can understand windfall tax better is the war between Ukraine and Russia due to which the price of crude oil surged all across the globe. In turn, the oil producing companies made a huge profit during 2022.
The Indian Government in turn levied the windfall tax on these oil companies so that they could meet their own trade deficit. The windfall tax came into effect on 1 September 2022 after being proposed in July 2022.
Who pays the Windfall Tax?
Windfall Tax are paid by company or entities who made significant profits due to events not in their control such as war, natural calamities, shortage in commodities, etc.
Profits earned from events such as inheritance and lottery winnings will have the windfall tax levied on it.
When did India introduce the Windfall Tax
India introduced the windfall tax on 1 July 2022 which came into effect on 1 September 2022. Windfall Tax was an excise duty levied on gas and diesel so that the country could meet the shortage of energy products in the market.
Previously, oil firms sought to sell their goods overseas since doing so allowed them to generate substantial profits while denying home markets access to affordable oil.
These refiners received incentives after 1 July to sell their goods to domestic oil marketing companies for wholesale or retail sales. OMCs felt relieved as a result of being able to buy oil from Reliance and other businesses for less money without having to pay the excise charge.
Disadvantages of Windfall Tax
There are certain issues with windfall tax, some of them which are listed below:
- Market uncertainty: Windfall tax is levied only if a company makes profits due to uncertain events. Windfall Tax in return may cause market uncertainty due to future other taxes that might be levied.
- Populist: Windfall tax is considered to be populist and opportunistic in nature.
- Future investment likely to be reduced: Due to this tax, future investment in a sector can decrease due to the chances of other taxes being imposed which might repel investors.
- Not defined: A lot about windfall tax is not defined properly such as what is considered to a windfall and what type of profit is excessive.
- Who should be taxed: There is clarity regarding who should be taxed and which companies with what revenues are likely to be charged the windfall tax.
Advantages of Windfall Tax
Some of the advantages of windfall tax are:
- Allows the government to increase revenue: Windfall Tax allows government to increase their revenue in other categories.
- Price of commodities goes down: The price of commodities who face shortage in India can go down. For instance, due to windfall tax, the price of petrol and diesel was slashed slightly.
Latest Updates on Windfall Tax
In response to rising global oil prices, the government increased the windfall profit tax assessed on domestically produced crude oil as well as on the export of diesel and ATF.
From 1,900 per tonne, the tax on crude oil produced by firms like Oil and Natural Gas Corporation (ONGC) has raised to 5,050 per tonne stated in an order date 3 February 2023.
Why are Countries levying windfall tax
Due to covid and the Russia-Ukraine war there has been significant shortage of commodities including oil, coal, and gas due to which their prices have risen. Due to this oil and energy companies have gained significant profits.
In order to meet these shortages, countries are now imposing windfall tax on the profits earned by these companies so that they can meet the deficits in other sectors.
The UN Secretary-General has also encouraged countries all over the globe to charge businesses windfall tax wherever applicable.
FAQs on Windfall Tax
- Did India recently reduce the windfall tax?
India in January 2023 had reduced the windfall tax on crude oil from Rs.2,100 per tons to Rs.1,900 tons. However, recently on 3 February 2023, the windfall tax was increased to Rs.5,050.
- If the price of crude oil drops then will the windfall tax also drop?
Yes, drop in price of crude oil will also result in drop in windfall tax.
- Did Vedanta’s net profit in third quarter of FY22-23 drop because of increased windfall tax?
Yes, Vedanta Limited saw their profits for the third quarter of FY22-23 drop due to increase in the windfall tax.
- Is windfall tax direct or indirect?
Windfall tax comes under the type of indirect tax.
- Is windfall tax applicable on aviation turbine fuel?
Companies that produce aviation turbine fuel will have to pay windfall tax if applicable.
- Who charges the windfall tax in India?
The Government of India charges the windfall tax.
- Who receives the windfall tax in India?
The Government of India receives the windfall tax in India.
- What is the other word for windfall called?
Windfall also means Profit in business terms.
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