Challenges of imposing the Windfall Tax
- Cut back on investment: After-tax private sector investment may decrease as a result.
- Problems with exports: If this tax applies to the goods that India exports to other nations, they may be burdened (still it has not been implemented on other products apart crude oil)
- Crisis in inflation: In an era of inflation, it is challenging to retain the windfall tax. Businesses can experience losses and market collapse.
Windfall Tax
A windfall gain tax is a higher tax rate on gains that come from a sudden windfall gain to a certain business or industry, typically as a result of a geopolitical disruption, natural disaster, or war that causes unusual spikes in demand or supply interruptions. A good example is a confrontation between Russia and Ukraine. The central excise charge was reduced, and there were additional expenditures on food and fertilizer. These factors led to an increase in government spending. In order to close the shortfall, the government levied a windfall tax on the oil industry.
In July 2022, the government of India enacted windfall taxes amid domestic crude producers making exceptional gains due to the global impact of the Russia-Ukraine war. Domestic players gained tremendous profit by selling crude to refiners at internationally bench-marked pricing. Recently, the government increased export taxes on gasoline and Aviation Turbine Fuel (ATF) to Rs 6 per liter or $12 per barrel and to Rs 13 per liter or $26 per barrel on diesel. The government levied a windfall tax on crude production of Rs 23,260 per tonne, or $40 per barrel.
Yet India is not the only country that levies this kind of tax. A number of nations have recently imposed the crude oil surcharge in response to the recent increase in crude prices. A windfall tax on energy corporations that have been hoarding enormous profits was announced in the UK in May. The first two nations to tax power plants were Italy and Romania, and the US and the EU are now considering doing the same with respect to the “war-fueled profits” of large energy companies.