Windfall Tax

GS Paper III Indian Economy

Context:

The Government has hiked the windfall profit tax on crude oil produced in the country and on export of diesel.

More on News:

The tax, levied in the form of special additional excise duty, on domestically produced crude oil has been raised to ₹7,100 per tonne from ₹4,250 per tonne.
Besides, the special additional excise duty (SAED) on the export of diesel has been increased to ₹5.50 per litre from ₹1 per litre. A duty of ₹2 per litre will be imposed on the export of jet fuel.

Excise Duty:

About Windfall Tax:

A windfall tax is a higher tax levied by the government on specific industries when they experience unexpected and above-average profits.
- For Example: Windfall tax was levied on the oil companies of the United States in the 1980s. There was a sudden rise in oil prices due to the crisis of oil in 1979, leading to windfall gain for the companies in the sector later on.
Purpose: To redistribute excess profits in one area to raise funds for the greater social good.
Introduction of Windfall Tax in India: 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.

Pros	Cons
Revenue Generation: Windfall taxes can provide governments with a significant source of additional revenue during periods of excessive profits which can be used to fund public services, infrastructure projects, or social welfare programs.	Discouragement of Investment: Windfall taxes might discourage businesses from making investments in sectors that are susceptible to windfall gains..
Redistribution of Wealth: Windfall taxes can help address income inequality by capturing excessive profits and redistributing them to benefit a wider population.	Uncertainty for Investors: Windfall taxes create uncertainty for investors, making it difficult for businesses to predict their potential returns and plan for the future.
Discouraging Excessive Profiteering: These taxes can discourage businesses or industries from taking advantage of unforeseen circumstances to generate disproportionately high profits, promoting fair market behavior.	Complex Implementation: Determining what constitutes a “windfall” and setting the appropriate tax rate can be challenging