Windfall Tax

Union government hiked the windfall tax levied on domestically-produced crude oil as well as on the export of diesel.

The Union government raised the windfall profit tax levied on domestically-produced crude oil and the export of diesel and aviation turbine fuel on February 3.
Windfall profits are unplanned increases in an entity’s earnings caused by an external event rather than a business choice.

About
- Windfall taxes are intended to tax earnings derived by a firm from an external, perhaps unprecedented event.
  - For example, energy prices have risen due to the Russia-Ukraine conflict.
- These gains cannot be traced to anything the firm actively did, such as an investment strategy or corporate expansion.
- A windfall is described as an “unearned, unplanned boost in money through no additional labour or expense“.
- Windfall tax is a one-time tax imposed by governments on such gains in addition to the standard taxation rates.
- Oil markets, whose price fluctuations contribute to fluctuating or inconsistent profits for the business, are one area where such levies have been constantly proposed.

Prices for oil, gas, and coal have risen sharply since last year and in the first two quarters of this year, but they have recently fallen.
Pandemic recovery and supply concerns caused by the Russia-Ukraine conflict boosted energy demand, driving up worldwide prices.
Rising prices generated massive and record profits for energy companies.
- But it also meant high gas and electricity bills for households in major and minor economies.
Multiple observers have referred to the gains as windfall profits because they were partly caused by exogenous change.

Uncertainty in the Market
- Companies are more likely to invest in a sector if the tax environment is predictable and stable.
- It can cause market confusion about future taxes because they are applied retroactively and frequently influenced by unanticipated events.
Reduces Future Investment
- The imposition of a temporary windfall profit tax discourages future investment.
- Because prospective investors will factor in the possibility of taxes when making investment decisions.
Not Defined Precisely
- It is unclear what defines actual windfall profits or how to evaluate whether the degree of profit is normal or excessive.
Populist in Nature
- Such taxes are thought to be populist and politically expedient in the near run.

Unexpected profits are redistributed when high prices benefit producers at the expense of consumers.
Funding for social welfare programmes.
Additional revenue stream for the government.

Pic Courtesy: The Hindu

Content Source: The Hindu