scorecardresearchWindfall tax: Why do governments around the world impose it?

Windfall tax: Why do governments around the world impose it?

Updated: 22 Dec 2022, 09:00 AM IST
TL;DR.

When economic conditions permit some businesses to generate sudden super profits, governments impose a higher tax rate, known as a windfall tax, on them. Here's all you need to know:

The windfall taxes were implemented on July 1, when the price of crude oil was at an all-time high.

The windfall taxes were implemented on July 1, when the price of crude oil was at an all-time high.

The government on December 15 reduced the windfall tax on domestic crude oil export to 1,700 per tonne from 4,900 per tonne, in line with the movement in the international crude oil prices which have been sliding lately. 

The windfall taxes were implemented on July 1, when the price of crude oil was at an all-time high owing to the crisis between Russia and Ukraine and energy corporations were generating enormous profits.

What is a windfall profit tax?

When economic conditions permit some businesses to generate sudden super profits, governments impose a higher tax rate, known as a windfall tax, on them. Therefore, these gains are taxed separately in addition to the regular taxes that these corporations pay. The tax on windfall profits is determined by deducting any price that producers get over a certain level.

The government has been revising the windfall tax almost every two weeks since its implementation on July 1.

Should this tax be levied?

There is always a split between proponents and opponents of the windfall tax, as is with other tax measures put in place by governments. One of the advantages of a windfall tax is that government agencies may utilise the money collected to increase financing for social services.

Windfall tax detractors contend that they hinder businesses' efforts to maximize earnings. They also think that businesses should reinvest their earnings in order to foster innovation, which would ultimately benefit society as a whole.

While some argue that the purpose of taxing windfall gains is to motivate the taxed parties to cut their prices for the benefit of consumers, the tax may ultimately discourage investment since the after-tax return may not be worthwhile.

In the case of crude oil, the government aims to maintain a steady supply in the domestic market since many refiners prefer to export crude oil rather than sell it within the country. The government intends to compel oil exporters to meet Indian domestic demand first by applying windfall taxes on exports to make exporting oil more expensive.

There are various other nations besides India that levy windfall taxes on businesses. UK levied a windfall tax on the oil and gas companies in May of this year. Italy has imposed a windfall tax as well. The country stated early in May that it will tax energy company earnings at a rate of 25 percent in order to help pay for a package of aid for customers and businesses that have been severely impacted by rising energy prices.

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First Published: 22 Dec 2022, 09:00 AM IST