WINDFALL TAX (Syllabus: GS Paper 3 – Economy)

Context: India has cut the windfall tax on petroleum crude to 5,700 rupees ($68.34) per metric ton from 8,400 rupees with effect from May 16.

Windfall Tax

• About: The purpose of a windfall tax is to impose additional taxes on a company's profits generated from an external event, often unexpected, such as the increase in energy prices due to the Russia-Ukraine conflict.
• According to the United States Congressional Research Service, a windfall is defined as an increase in income that is neither earned nor anticipated, and it does not result from any extra effort or expenses on the part of the entity.
• These profits cannot be attributed to the company's intentional actions, such as an investment strategy or business expansion.
• Governments typically impose a retroactive one-time tax, known as a windfall tax, on such profits, in addition to the regular tax rates.

The Reason for Implementing a Windfall Tax 

• It is introduced to finance social welfare initiatives.
• It serves as an additional source of income for the government.
• It functions as a means for the central authority to reduce the nation's expanded trade deficit.

Other Key Terms:

• Tax Buoyancy: It serves as an indicator used to gauge the effectiveness and adaptability of revenue collection in correlation with the expansion of Gross Domestic Product (GDP) or National Income.
• Tax Elasticity: It Tax elasticity means how much tax revenue changes when tax rates change. It shows how a higher tax rate affects the total tax amount collected.
• Angel Tax: An income tax levied, when an unlisted company issues shares to an investor at a price higher than its fair market value.