WINDFALL TAX (Syllabus: GS Paper 3 – Economy)

Context: Consumption of diesel dropped 2.9% and that of petrol rose 0.4% in August over last year, according to the state oil companies' data.

The demand for aviation turbine fuel (ATF) rose 9.5% year-on-year in August while that for LPG rose 4.4%.

Windfall Tax

• 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.