What is a windfall tax?

A windfall tax is a levy imposed by a government on companies that have benefited from something they were not responsible for – in other words, a windfall.

In other words windfall tax is an extra tax that a government charges a company when it makes a large unexpected profit, especially if they have been helped by economic conditions.

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.

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.

When was the Windfall Tax introduced in India?

Windfall Tax was introduced in the 1970s with the sole intention of taxing businesses making high profits.

What is the purpose of 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 Government to narrow the country’s widening trade deficit.

What is the economic rationale for imposing windfall taxes recently?

The economic rationale for imposing windfall taxes is that India’s trade deficit had increased to record high levels and a weak rupee had increased the value of India’s imports.

Moreover, the government’s spending has gone up after it cut Central Excise Duty and spent more on food and fertilises. It then decided to levy windfall tax on oil companies to make up for this gap as the windfall tax adds to the government’s earnings.

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.

Give an example of a windfall tax?

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.

New Delhi issued the rare restrictions after private refiners Reliance Industries and Nayara Energy, key Indian buyers of discounted Russian supplies, began reaping major profits by aggressively boosting fuel exports instead of domestic sales.

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 lottery may be levied windfall tax.

The most common industries that fall target to windfall gains tax include oil, gas, and mining.

What are the demerits of Windfall Tax?

Windfall tax is levied only if a company makes profits due to uncertain events. Windfall Tax in return may cause market uncertainty because market may get a perception that in future other taxes also might be levied.

Windfall tax is considered to be populist and opportunistic in nature.

Due to this tax, future investment in a sector can decrease due to the chances of other taxes being imposed which might repel investors.

A lot about windfall tax is not defined clearly such as what is considered to be a windfall and what type of profit is excessive.

There is lack of clarity regarding who should be taxed and which companies with what revenues are likely to be charged the windfall tax.

What are the merits of Windfall Tax?

Windfall Tax allows government to increase their revenue.

The price of commodities which face shortage can go down. For instance,in India due to windfall tax, the price of petrol and diesel was slashed slightly.