News Highlight
The Oil Ministry has sought a review of the two-and-a half windfall tax on domestically produced crude oil.
Key Takeaway
- The Ministry sought exemption for fields or blocks—which were bid out to firms under the Production Sharing Contract (PSC) and the Revenue Sharing Contract (RSC)—from the new levy.
What is the windfall profit tax?
- “A windfall tax” is a higher tax rate on profits resulting from a sudden windfall gain to a particular company or industry, often due to a geopolitical disturbance, war, or natural disaster that creates unusual spikes in demand and/or interruptions to supply.
- India first imposed the windfall profit tax on July 1, joining many nations that tax the supernormal profits of energy companies.
- Rationale:
- 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 an additional revenue stream for the government.
Positives of imposing a windfall tax
- Redistribution of unexpected gains:
- The abnormal profits companies make are due to external forces shared with the government.
- Increasing tax revenue:
- The government can increase its tax revenue by imposing a windfall tax.
Issues with Imposing Windfall Tax
- Adverse impact on investments:
- Introducing a temporary windfall profit tax may reduce future investment because prospective investors will internalise the likelihood of potential taxes when making investment decisions and avoid uncertainty on account of the retrospective nature of tax and the influence of unexpected events and surprises.
- Uncertainty in the Market:
- 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.
- Not Defined Precisely:
- It is not defined what exactly constitutes true windfall profits and how it can be determined what level of profit is normal or excessive.
Content Source: The Hindu