Windfall Tax on Crude Petroleum Slashed to Zero

The government has scrapped the windfall tax on domestically produced crude oil with effect from September 18. The windfall tax on domestically produced crude oil will be zero, the government said in a notification.

What is the Windfall Tax?

• It is a tax levied by governments against certain industries when economic conditions allow those industries to experience significantly above-average profits.
• The term “windfall” refers to an unexpected rise in profits, and the tax on windfall gains is known as the windfall tax. 

When is it imposed?

• When the government notices a sudden increase in an industry’s revenue, they impose this tax.
• However, these revenues cannot be linked to anything the company actively pursues, such as its business strategy or expansion.
• Rather, it is related to a one-off external event for which the business is not responsible. 
• Consequently, a Windfall Tax is imposed on an industry’s profits when it experiences a sharp increase in revenue due to unrelated external events.

Purpose

• • Redistribution of unexpected gains when high prices benefit producers at the expense of consumers
  • To fund social welfare schemes
  • As a supplementary revenue stream for the government
  • As a way for the Government to narrow the country’s widening trade deficit.

Who Has to Pay Windfall Tax?

• Business Companies and Industrial Houses that have experienced significant increases in profits, typically due to circumstances like war, commodity shortages, and other situations and events that raise prices, may be subject to windfall taxes.
• The most common industries that fall target to windfall gains tax include oil, gas, and mining.

When did India introduce the Windfall Tax

• India introduced the windfall tax on 1 July 2022 which came into effect on 1 September 2022. 
• Windfall Tax was an excise duty levied on gas and diesel so that the country could meet the shortage of energy products in the market.
• Previously, oil firms sought to sell their goods overseas since doing so allowed them to generate substantial profits while denying home markets access to affordable oil. 

Advantages of Windfall Tax

• Allows the government to increase revenue
• Price of commodities goes down

Disadvantages of Windfall Tax

• Market uncertainty
• Future investment likely to be reduced
• Not defined properly
• No clarity who should be pay tax