Finance Minister Nirmala Sitharaman defended the windfall tax imposed by the Centre on domestic crude oil producers. She said the introduction of the windfall tax as a way to rein in the phenomenal profits made by some oil refiners. These refiners chose to export fuel to reap the benefits of skyrocketing global prices while affecting domestic supplies.
- The Central government on July 1, introduced a windfall profit tax of ₹23,250 per tonne on domestic crude oil production.
- This was subsequently revised fortnightly four times so far.
- Analysts believe that the windfall tax in India was targeted mainly at Reliance Industries Ltd and Russian oil major Rosneft-backed Nayara Energy.
- As per the government, these companies were making a killing on exporting large volumes of fuel made from discounted Russian oil at the cost of the domestic market.
- Keeping the national interest in mind, India started to import cheap Russia oil after the Ukraine war.
What is ‘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.
- The United States Congressional Research Service defines a windfall as an unearned, unanticipated gain in income through no additional effort or expense.
- These are profits that cannot be attributed to something the firm actively did, like an investment strategy or an expansion of business.
- Governments typically levy a one-off tax retrospectively over and above the normal rates of tax on such profits, called windfall tax.
Rationale behind imposing windfall taxes –
- Redistribution of unexpected gains when high prices benefit producers at the expense of consumers,
- To fund social welfare schemes,
- As a supplementary revenue stream for the government,
- As a way for the Centre to narrow the country’s widened trade deficit.
Why are countries levying windfall taxes now?
- Prices of oil, gas, and coal have seen sharp increases since late last year and in the first two quarters of the current year, although having reduced recently.
- The increase stems from a combination of factors, including a mismatch between energy demand and supply during the economic recovery from COVID-19, further amplified by the Russian war in Ukraine.
- The rising prices meant huge and record profits for energy companies while resulting in hefty gas and electricity bills for household bills in major and smaller economies.
- Eg., the combined profits of Shell, Exxon Mobil, Total Energies, BP, Chevron Corp and Saudi Aramco went from $45.09 billion in Q2 2021 to $107.64billion in Q2 2022.
- Since the gains stemmed partly from external change, multiple analysts have called them windfall profits.
Multilateral institutions supporting windfall tax –
- The calls to introduce windfall taxes found support in organisations like the IMF, UN, and Organisation for Economic Co-operation and Development (OECD).
- Recently, the U.N. chief urged all governments to tax these excessive profits and use the funds to support the most vulnerable people through these difficult times.
- He said it was immoral that the largest energy companies in the first quarter of the year made combined profits of close to $100 billion.
Issues with windfall tax –
- Brings uncertainty in the market —
- Since windfall taxes are imposed retrospectively and are often influenced by unexpected events, they can brew uncertainty in the market about future taxes.
- This may affect the future investment in the related sectors.
- Populist in nature —
- Many analysts believe that such taxes are populist and politically opportune in the short term.
- The IMF advice note also said that taxes in response to price surges may suffer from design problems—given their expedited (quick) and political nature.
- Profits earned in such instances are reward for the risk taken —
- Companies argue that it is the profit they earned as a reward for the industry’s risk-taking to provide the end user with the petroleum product.
- Who should be taxed is another issue —
- Another issue is who should be taxed — only the big companies responsible for the bulk of high-priced sales or smaller companies as well.
- This raises the question of whether producers with revenues or profits below a certain threshold should be exempt.