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Windfall tax – Definition & India’s approach amid economic shifts

Could your unexpected fortune be subject to a windfall tax?

windfall tax

A windfall tax is a special tax that governments put on certain companies when they earn a lot more money because of economic changes This tax is mostly exercised on companies that deal with everyday goods like oil, gas, and coal when they make a lot of profit.

How do windfall taxes work?

Mostly, companies that sell oil and gas face windfall taxes. For instance, when their earnings went very high, the governments decided to impose extra taxes on them.

For example, in the past, when global oil prices went up, Indian oil and gas companies like ONGC and Reliance Industries made higher profits. The government sometimes considers a windfall tax on these companies to collect more money. This extra money can be used to help people and businesses who struggle with higher fuel and electricity costs.

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Windfall tax scenario in India

The windfall tax in India was introduced to ensure that the government could garner additional revenue from oil and gas companies due to the significant increase in crude oil prices in 2022. Here are some specific instances and details regarding the windfall tax imposed on Indian companies:

Introduction of windfall tax: The Indian government introduced a windfall tax on oil producers in July 2022. This tax was reviewed fortnightly, and in a review effective from 1 September 2022, the levies on domestically produced crude were raised to Rs 13,300 per tonne​​.

Initial tax rates: When the windfall tax was first imposed on July 1, 2022, the government set the tax rates at Rs 6 per litre on petrol and ATF (Aviation Turbine Fuel), and Rs 13 per litre on diesel​​.

Impact on companies: The imposition of the windfall tax was in response to the over 50% increase in crude costs in 2022, impacting refiners, including ONGC and Reliance. The management of ONGC and Oil India expressed surprise over this move by the government​.

Windfall tax adjustments in India

The windfall tax scenario in India has witnessed several changes over the recent months:

New tax rates effective November 1, 2023: The central government has updated the windfall tax rates, which became effective on November 1, 2023. The entities mainly contributing to the revenue generated from these taxes include GAIL, Oil India, and ONGC, with an estimated total revenue of Rs 65,600 crore​​.

Increase in September 2023: On September 15, 2023, the windfall tax on petroleum crude was raised to Rs 10,000 per tonne from Rs 6,700 per tonne, with the increase coming into effect from September 16​​.

Further increase and subsequent reduction: The tax on petroleum crude saw a further hike to Rs 12,100 per tonne effective September 30, 2023, but was later reduced to Rs 9,050 per tonne effective October 18, 2023. Additionally, the levy on aviation turbine fuel was cut to Rs 1 per litre, and the windfall tax on diesel was reduced to Rs 4 per litre from Rs 5 per litre​.

Possible phasing out: As oil prices began to moderate, Fitch Ratings mentioned that the five-month-old tax on windfall profits by oil companies would be phased out in 2023. The tax rates have been revised every fortnight based on prevailing international rates​​.

Earlier changes in 2023: In May 2023, the Centre had initially slashed the windfall tax on petroleum crude to zero from Rs 4,100 per tonne, but later reimposed a tax of Rs 1,600 per tonne​.

The windfall tax debate

Windfall tax creates different opinions. Some people like it because governments use the money for social help. Others don’t because they feel it takes away the interest of companies to earn profits. They believe companies should use profits to create new things which will help everyone.

Also Read: How much tax do you pay on stock market gains?

Windfall taxes on individuals

Windfall tax can also affect people who suddenly get a lot of money like a big gift, inheritance, or money from game shows, gambling or lotteries. Usually, money received from family or friends, and life insurance is not taxed for the one at the recieving end. 

However, the person giving the gift, the estate or giving the inheritance might have to pay the tax. Money won from lotteries or gambling is taxed and needs to be told to the tax department. If a person gets a big amount from winning a court case, they might have to pay tax, unless the money is for personal physical injuries or sickness, which is not taxed.

Who has to pay a windfall tax?

Windfall tax is paid by companies or sectors which see a big jump in profits. This jump often happens when things like war, shortage of goods, or other big events that make the prices go up. Sometimes, people too have to pay this tax, when they get a lot of money suddenly from inheritance or winning a lottery.

Who benefits from revenue raised by windfall taxes?

Governments collect windfall taxes and use them for different needs. In the times of World War I and World War II, money from windfall tax helped in war-related costs. In 1980, it was added to the general funds of the government. Recently, the EU Council in 2022 decided to use this tax money to help households and companies. This is to reduce the burden of high electricity prices on people.

Also Read: Old vs. New – Which income tax regime is better for FY 2023-24?

The bottom line

Windfall tax is always a topic of discussion between the companies making more profits and the rest of the people. For example, the huge profit increase seen by oil and natural gas companies, is making people talk about windfall taxes again. 

The International Energy Agency says that the profits of these companies might double from 2021 to 2022, reaching a huge sum of around ₹150 lakh crore. For now, Exxon’s shareholders are benefiting as they got more dividend when Exxon announced a profit of nearly ₹1.5 lakh crore from July to September.

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Akanksha Jha

With extensive writing experience and years deep in the stock market and fintech sectors, I excel at transforming intricate financial concepts into clear, actionable insights. I'm dedicated to guiding readers on their financial paths with confidence and clarity.

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