What Is Windfall Tax And Why Do Companies Have To Pay It?

On July 1, the government imposed a windfall tax on domestic oil producers after they recorded steep revenues in the March quarter in view of record-high international crude oil prices. 

The government recently levied export duties amounting to Rs 6 per litre of $12 per barrel on petrol and ATF, while it imposed Rs 13 a litre or $26 a barrel on diesel. The government imposed Rs 23,260 per tonne or a $40 per barrel windfall tax on crude production. 

The crude oil prices have skyrocketed following the Russia-Ukraine war and the country’s oil companies recorded more than normal profits due to this.

However, the government decided to have its share of the pie and levied the windfall tax on the profits. The government, however, slashed the windfall tax nearly three weeks after it was imposed. But the question is it normal for companies to face this extra tax or is there more to it, let’s find out:

What Is A Windfall Tax?

A windfall tax is a one-off tax imposed by a government on a company. When a company benefits from something that they are not responsible for, the financial gain that ensues is called windfall profits. 

Governments, typically, levy a one-time tax over and above the normal rates of tax on such profits, and that is called windfall tax. 

As the government’s spending has gone up after it recently cut Central Excise Duty and spent more on food and fertiliser, it levied a windfall tax on oil companies to make up for the gap.

Why Tax Was Imposed Only On Domestic Oil Producers? 

The international crude prices have surged in the last few months. The domestic crude producers sell crude to domestic refineries at international parity prices. 

With the rise in crude prices, domestic oil producers and refiners made additional revenue as crude oil was selling at a record $120 per barrel in the international market recently.

Besides, Indian refiners were also making profits by importing discounted crude oil from Russia and selling them outside the country. Domestic refiners were earning far more by selling their oil overseas where they fetched better prices. The government imposed an export tax to check this practice.

How The Government Benefits From The Windfall Tax?

The windfall tax adds to the government’s earnings. 

The government had in May announced an excise duty cut of Rs 8 and Rs 6 per litre on petrol and diesel respectively to cool down inflation. 

Finance Minister Nirmala Sitharaman had said this will have revenue implications of around Rs 1 lakh crore a year for the government.

As per a PTI report, the windfall tax on crude production alone was estimated to generate revenue of Rs 65,600 crore and tax on export products another Rs 52,700 crore if they were to be continued for the full year. 

Thus, the revenue from windfall taxes can help the government make up for the losses. 

Why The Government Slashed The Windfall Tax After A Few Weeks?

Just 20 days after it was imposed, the government slashed windfall taxes on fuel exports and local crude oil sales after global oil prices dropped.

The Centre scrapped a Rs 6 per litre tax on the export of petrol completely and reduced the same on aviation turbine fuel (ATF) to Rs 4 a litre from Rs 6 per litre. Besides, the tax on diesel has been reduced to Rs 11 from Rs 13 per litre. Further, tax on domestically-produced crude has been cut by 27 per cent to Rs 17,000 per tonne.

As per a report in news agency PTI, the windfall tax scrapped away 40 per cent of earnings for oil producers. This is apart from the royalty and cess that they are required to pay. 

However, Brent crude price cooled off by $15-20 per barrel in the past couple of weeks to $100 per barrel.

The slashing of windfall taxes is expected to benefit Reliance which operates two oil refineries in Gujarat, out of which one is focused only on exports, state-owned ONGC and Oil India Ltd, and Vedanta Ltd account for almost all of the crude oil produced in the country, and Russia’s Rosneft-backed Nayara Energy, which operates a 20 million tonnes a year refinery at Vadinar in Gujarat.

Is India The Only Country To Impose Windfall Tax?

India is not alone, there are several other countries that impose windfall taxes on companies.

In May this year, the then UK Finance Minister Rishi Sunak imposed a windfall tax on oil and gas majors. “The oil and gas sector is making extraordinary profits not as the result of recent changes to risk-taking or innovation or efficiency but as the result of surging global commodity prices driven in part by Russia’s war,” Sunak told lawmakers in the House of Commons.

Italy also levied a windfall tax recently. Early in May, Italy announced taxing the profits of energy companies at 25 per cent to help fund a support package for consumers and businesses that have been hard-hit by soaring energy costs. The tax is a hike from an existing 10 per cent windfall tax imposed in March on the profits of energy companies.