Everything You Need to Know About Windfall Tax

How Does Windfall Tax Work?

You may still be immune to the effects of a Windfall Tax if you are an investor who has just considered purchasing in an upcoming Initial Public Offering (IPO). Such a tax is typically imposed on long-established businesses that stand to gain from any external factor.

In simple words, Profits are Windfalls. Therefore, taxes on Windfall Profits are known as Windfall Taxes. These are essentially made to tax anyone who benefits from a new or unexpected situation or event. The crisis between Russia and Ukraine might serve as an example of such a situation. As a result, the tax imposed has nothing to do with any company’s production process or actively, frequently strategized and thought-out policy.

This might be attributed to a tax, which occurs only once. It is also crucial to be aware that it is added on top of the standard tax rate in retrospect. Traders often bring up windfall taxes in the context of the stock market and goods whose prices experience high volatility.

Impact of Windfall Tax

As you may already be aware, the conflict between Russia and Ukraine caused crude oil prices to skyrocket. As a result, India's oil companies recorded their highest net gains ever during the last fiscal year of 2022, making extraordinary profits. Further, among the top revenue producers are ONGC, Oil India, and GAIL.

Corresponding to this event, the government imposed this Windfall Tax rate on oil producers to cover India's trade deficit and raise spending on food and fertilizers. This tax was proposed in July 2022 and went into effect on September 1 of that same year.

Further, the government raised the excise tax on diesel exports from ₹6 to ₹12 per litre. Additionally, they increased export taxes on gasoline and diesel by ₹6 per litre and ₹13 per litre, respectively, and revised the export cess on aviation turbine fuel.

Due to the decline in oil prices on the global market by mid-July, this tax was reduced and revised. On August 2, 2022, the government made another revision, reducing some taxes and raising others.

Finally, diesel export taxes rose by ₹7 per litre on August 19, 2022. The tax rate on ATF was reinstated at ₹2 per litre. But the government only charges ₹13,330 per tonne of domestic crude oil. On August 31, 2022, the levied taxes were revised and raised.

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.

Windfalls, such as those from inheritances or lottery winnings, may also be taxed to Individuals. 

When Did India Introduce Windfall Tax?

To address the shortage of energy products on the domestic market, the Indian government added a special additional excise duty on the export of gasoline and diesel, known as the Windfall Tax, on July 1st, 2022.

Diesel was subject to a ₹13 per litre surcharge in addition to the ₹6 per litre added to gasoline and ATF (Aviation Turbine Fuel). Additional export limitations were also put in place.

Before that, oil companies preferred to sell their products abroad because doing so allowed them to make sizable profits while denying domestic markets access to cheap oil.

After July 1, these refiners received incentives to market their products to domestic oil marketing companies for bulk or retail sales. As a result, OMCs were relieved because they could purchase oil from Reliance and other companies at a lower price without paying the excise duty.

Further, as time passed, the export taxes on gasoline and ATF were eliminated, and the one on diesel was more than halved. This increased the stock price of oil refineries like Vedanta Ltd. and helped investors regain confidence.

However, an additional special excise duty of ₹3.5 per litre was imposed on ATF in October, while the diesel excise duty was raised to ₹10.5 per litre. This response was to the momentarily elevated global oil prices brought on by OPEC's announcement to limit crude oil production. Currently, the amount of the windfall tax is reviewed every two weeks.

Why are Countries Levying Windfall Taxes Now?

Since the past few years, gasoline prices, crude oil, gas, and coal have significantly increased. COVID-19 and the conflict between Ukraine and Russia made this increase even more pronounced. Because of this, energy companies profited handsomely at the expense of consumers, who now pay much higher prices for their energy use.

The UN Secretary-General, therefore, encouraged nations to impose windfall taxes on those companies that have greatly benefited from the rise in the price of fossil fuels. As a result, many countries, including the UK, Germany, and others, besides India, are considering imposing Windfall Taxes.

Conclusion

In conclusion, a windfall tax is a tax that a government may impose or an additional tax that may be imposed on a business when it generates a sizable unanticipated profit, particularly if the company has benefited from favourable economic conditions.

Companies in specific economic sectors, such as the oil and gas industry, that profit from circumstances like commodity shortages that significantly drive up the cost of their goods at the expense of consumers may be subject to windfall taxes. Depending on the source of the money and the local, state, and federal tax laws, people may also be required to pay tax on a windfall.

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.