WINDFALL TAX: A WINDSTORM OR GENTLE BREEZE? – India’s bold move to capture Excess Profits (Part 1)

What is windfall tax?

Unlike regular taxes like Income tax and other Indirect taxes, Windfall tax, as its name suggests, is a temporary tax levied on windfall gains, i.e., when unprecedentedly high revenue is earned by one or more industries. This tax is designed to capture those sudden surges in wealth, sometimes at rates that can soar to a jaw dropping 95%.

Come, let us see more about windfall taxes and how they make sure nobody is left untouched when a financial windfall occurs.

Global History

The history and popularity of the Windfall tax lies right from World War I and around 22 countries levied it due to the then unexpected economic conditions. This was known as the “Excess Profit tax” then and was used as funding support for war by many countries. Later, it was widely adopted by the UK, USA, India, North Korea, Australia, Germany, and many more for various industries engaged in oil and gas, mining, technology, tobacco and alcohol, and so on.

Windfall tax in India

Today, we are discussing windfall tax due to the ebb and flow of this temporary tax rate imposed on domestic crude oil. Why did India levy Windfall tax now? Let us get to know more…But before that, let us find out how India managed to regulate various industries with excess profits.

Back in the 1970s, India had implemented windfall tax on oil, telecom, mining, coal, natural gas, sugar industries, and finally crude oil on July 1, 2022. The international crude oil prices suddenly surged due to Russian- Ukraine war, as Russia is the largest producer of crude oil in the world and the largest exporter to Europe and Asia and such exports were routed via Ukraine.

The International crude oil prices for the past 5 years are represented in the chart below (source: trading economics) and this shows why the Indian government considered to impose Windfall tax:

Windfall tax

The shortage in supply with the rising international demand, gave a boost to domestic oil producers like ONGC, IOCL, Vedanta Ltd, Reliance Petroleum Ltd and Nayara Energy to gain extraordinary profits. As a result, the Indian government imposed windfall tax on crude oil and additional excise duty on the export of diesel, gas, and aviation turbine fuel when these domestic companies started exporting more than selling off in the local market.

To meet the shortage of these products within the country and to curb windfall gains, India imposed windfall tax which was revised fortnightly depending on international price changes and foreign exchange rates. This move was because the domestic crude oil producers were selling them at international rates to the domestic refineries. Thus the government felt the need to plough these windfall gains back to the Indian economy.

Was that the only measure taken to meet the nation’s oil procurements? The Director General of Foreign Trade also restricted 50% of quantity disclosed in the shipping bill to be mandatorily supplied in domestic market during the year.

The windfall tax rates and special excise duty now are Rs.10, 000 per tonne, Rs.5.5, Nil, and Rs.3.5 per litre (as on September 16, 2023) on crude oil, diesel, petrol, and aviation turbine fuel respectively against Rs.23, 250 per tonne, Rs.13, Rs.6, and Rs.6 per litre imposed on July 1, 2022.

Conclusion

In conclusion, we've delved into the reasons behind the implementation of a windfall tax in India, a move that mirrors similar actions taken by numerous countries across the globe towards energy sector. This taxation strategy has its fair share of advantages and disadvantages, impacting both the government's revenue and the energy industry's operations.

To explore these pros and cons in greater detail and uncover the broader implications for India's energy sector, I invite you to stay tuned for Part 2 of this blog. Thanks for reading, I look forward to sharing more insights with you soon!