WINDFALL TAX (Syllabus: GS Paper 3 - Economy

Context: The government has hiked windfall tax on petroleum crude to ?4,250 per tonne from ?1,600 with effect from August 1. 

• A windfall tax on diesel has been increased to 1 rupee per litre from nil earlier.
• The windfall tax on petrol and aviation turbine fuel has been left unchanged.

Windfall tax 

• About: 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.

• Governments typically levy a one-off tax retrospectively over and above the normal rates of tax on such profits, called windfall tax.

• These are profits that cannot be attributed to something the firm actively did, like an investment strategy or an expansion of business. 

• Definition: The United States Congressional Research Service (CRS) defines a windfall as an “unearned, unanticipated gain in income through no additional effort or expense”.

• 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 a supplementary revenue stream for the government.

• Issues with imposing such taxes: 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.

• 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.