What is the Windfall Tax?

About Windfall Tax:

• It is a higher tax imposed on specific industries when they make unusual and above-average profits.
• The term “windfall” refers to an unexpected rise in profits, and the tax on windfall gains is known as the windfall tax. 
• The increase in profits is not attributed to any expansion or investment strategy of a business but to a favourable external factor for which the business is not responsible.
• A windfall tax is levied on industries or businesses that make disproportionate profits during unexpected situations like commodity shortages, wars, pandemics, changes in government policy, etc. 
• The most common industries that fall target to windfall gains tax include oil, gas, and mining.
• Some individual taxes—such as inheritance tax or taxes on lottery or game-show winnings—can also be construed as a windfall tax.
• Objective:
  • The primary objective of windfall taxes is to appropriate a portion of these extraordinary profits, which are perceived to exceed normal returns, for the public good. 
  • Governments assert that these profits are not solely due to the taxed entity’s efforts but also due to external factors, justifying the redistribution of such gains to benefit society as a whole.
  • It is also used as a supplementary revenue stream for the government.

Q1: What is a Direct Tax?

A direct tax is a tax that a person or organization pays directly to the entity that imposed it. Examples include income tax, real property tax, personal property tax, and taxes on assets, all of which are paid by an individual taxpayer directly to the government.

Source: Government scraps windfall tax on crude petroleum, effective from today