Windfall Tax is an additional higher rate of tax charged by the government on certain industries if external economic factors cause an above-normal increase in the profit of that industry. In today’s dynamic world, where the elements of inputs in industries and tech is constantly changing, alteration in geo-political factors can result in Industries earning humongous profits suddenly without taking action towards earning those profits. The government levies an additional tax on the sudden profit earned by the industries which doesn’t include the normal profit earned by the industries. Let’s better understand this with an example.
Which Industry paid Windfall tax levied in India ?
A recent scenario of the Windfall Tax being imposed in India was on the Oil and Gas industry. After the breakout of war between Russia and Ukraine, the price of crude oil (raw material used in the production of Petrol and Diesel) per barrel skyrocketed from $76 per barrel in Jan 2022 to $110 per barrel on 4 march 2022 and continued to soar to $139 per barrel. The Russian government began selling crude oil at discounted rate compared to the global price to few countries including India.
The Oil and Gas industry in India imported crude oil at a cheaper price from Russia and sold it at the inflated market rate in the global allowing the industry to earn above-normal profits due to geo-political changes globally without any existing industry strategy to increase their profits. The conflict was the sole cause for the profit of the Oil and Gas Industry to earn its increased profits. Three Government Oil Companies – ONGC, Oil India and GAIL declared all time high net profit in the fiscal year 2022.
Reasons for levying Windfall Tax
The trade deficit has increased to record high levels as the falling rupee has increased the value of India’s imports. The Governments expenditure has increased as it spent more on food and fertilizers after recently cutting Central Excise Duty on fuel. The Windfall tax was levied on Oil Companies to close the gap in government expenditure and add to its earnings. The government levied the tax to ensure the constant supply of crude oil in the domestic market. Oil exporters are mandated to fulfil India’s domestic oil needs and levied windfall taxes on the export of oil.
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