WINDFALL TAX - ECONOMY
News: Windfall-profit
tax on crude oil halved, levy on export of diesel too slashed
What's in the news?
● The
government on December 1 slashed to less than half the windfall-profit tax on
domestically produced crude oil and also reduced the levy on diesel.
● The
revised tax rates become effective from December 2.
Key takeaways:
● The
tax on crude oil produced by firms such as state-owned Oil and Natural Gas
Corporation (ONGC) has been reduced to ₹4,900 per tonne from the existing
₹10,200 per tonne, as per a government notification issued on December 1.
● In
the fortnightly revision of windfall profit tax, the government cut the rate on
export of diesel to ₹8 per litre from ₹10.5 per litre. The levy includes ₹1.5
per litre as road infrastructure cess.
● The
special additional excise duty on petrol continues to remain nil and that on
aviation fuel ATF at ₹5 a litre.
● When
the levy was first introduced, a windfall tax on export of petrol alongside
diesel and ATF (Aviation Turbine Fuel) too was levied. But the tax on petrol
was scrapped in subsequent fortnightly reviews.
What is the 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.
● These
are profits that cannot be attributed to something the firm actively did, like
an investment strategy or an expansion of business.
● The
United States Congressional Research Service (CRS) defines a windfall as an “unearned, unanticipated gain in income
through no additional effort or expense”.
● Governments
typically levy a one-off tax retrospectively over and above the normal rates of
tax on such profits, called windfall tax.
Instances of windfall taxes:
● One
area where such taxes have routinely been discussed is oil markets, where price
fluctuation leads to volatile or erratic profits for the industry.
● There
have been varying rationales for governments worldwide to introduce windfall
taxes, from redistribution of unexpected gains when high prices benefit
producers at the expense of consumers, to funding social welfare schemes, and
as a supplementary revenue stream for the government.
● For
instance, in 1980, then United States President Jimmy Carter introduced a crude
oil windfall profit tax on the country’s oil industry. This was because the
U.S. government between 1979 and 1981 started releasing controls on oil prices
and anticipated that this decontrol would lead to oil companies making huge
profits.
Windfall tax on current scenario:
● 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.
● Pandemic recovery and
supply issues resulting from the Russia-Ukraine conflict shore up energy demands, in
turn driving up global prices.
● 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. Since the gains stemmed partly from external change,
multiple analysts have called them windfall profits.
Windfall tax and India:
● In
July, India announced a windfall tax
on domestic crude oil producers who it believed were reaping the benefits of the
high oil prices. It also imposed an additional excise levy on diesel, petrol
and air turbine fuel (ATF) exports.
● India’s
case was different from Europe's, as it was still importing discounted Russian
oil.
● The
windfall tax was targeted mainly at Reliance Industries Ltd and Russian oil
major Rosneft-backed Nayara Energy, who the government believed were making a
killing on exporting large volumes of fuel made from discounted Russian oil at
the cost of the domestic market.
Concerns:
1. Affecting investment in the economy
- Analysts say that companies are confident in investing in a sector if there
is certainty and stability in a tax regime. Since windfall taxes are imposed retrospectively and are often influenced
by unexpected events, they can brew
uncertainty in the market about future taxes.
2. Affecting the risk-taking ability of the company - If rapid increases in prices lead to higher profits, in one sense it can be called true windfalls as they are unforeseeable but, on the hand, companies may 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.
3. Another issue is who should be taxed
- only the big companies responsible for the bulk of high-priced sales or
smaller companies as well - raising the question of whether producers with
revenues or profits below a certain threshold should be exempt.