Windfall Profits of Oil Companies

Context: 

Recently, the Union government hiked the windfall profit tax levied on domestically produced crude oil as well as on the export of diesel and aviation turbine fuel (ATF).

About Windfall Profits:

• ‘Windfall profits’ refer to an unanticipated spike in earnings of an entity resulting from an exogenous event (which could be one-off and/or prolonged) and not resulting from a business decision. 
• The B.K. Chaturvedi committee’s report on the Financial Position of Oil Companies (2008) had stated that taxing of these windfall gains has been seen as a prerogative of governments, in part to meet fiscal needs and in part to pursue redistributive justice. 
• The central idea here is for governments to capitalize on the lofty profits made by the entities and use it for specific domestic pursuits.
• Windfall taxes spur collections of revenue to guard against the consequences of a larger geopolitical event or redistribute them for it to be used for domestic social service schemes. 
• Windfall taxes are reviewed on a fortnightly basis and are subject to factors such as international oil prices, exchange rate and quantity of exports.

Reasons for Windfall Gains: 

• Russia’s actions in Ukraine created the volatility observed in the oil market in the previous calendar year.
• Russia was among the major players in the global oil market and among the largest producers alongside Saudi Arabia and U.S. 
• As a response to Russia’s actions, several Western countries moved to stop or curtail their energy imports from Russia. 
• This led to sharp increases in fossil fuel prices as sovereigns went to look for other suppliers for its energy needs, culminating in major profits for oil companies.

News Source: The Hindu