Windfall Tax Increased

What’s in today’s article?

• Why in news?
• Background:
• What is Windfall tax?
• Why windfall taxes are imposed by the government?
• Why are countries all over the world have started levying windfall taxes now?
• Why imposition of windfall taxes are criticised?

 

Why in news?

• The government has hiked windfall profit tax levied on domestically-produced crude oil as well as on the export of diesel and ATF.
• Crude oil pumped out of the ground and from below the seabed is refined and converted into fuels such as petrol, diesel and ATF.
• According to the notice, the levy on crude oil produced by companies such as Oil and Natural Gas Corporation (ONGC) has been hiked to ₹5,050 per tonne from ₹1,900 per tonne.

 

Background:

• India first imposed windfall profit taxes on July 1, joining a growing number of nations that tax super normal profits of energy companies. 
  • At that time, export duties of ₹6 per litre ($12 per barrel) each were levied on petrol and ATF and ₹13 a litre ($26 a barrel) on diesel.
    • The export tax on petrol was scrapped after first review.
  • A ₹23,250 per tonne ($40 per barrel) windfall profit tax on domestic crude production was also levied.
• The tax rates are reviewed every fortnight based on average oil prices in the previous two weeks.

 

What is Windfall tax?

• Windfall taxes are designed to tax the profits a company derives from an external, sometimes unprecedented event— for instance, the energy price-rise as a result of the Russia-Ukraine conflict.
• The United States Congressional Research Service defines a windfall as an unearned, unanticipated gain in income through no additional effort or expense.
• These are profits that cannot be attributed to something the firm actively did, like an investment strategy or an expansion of business.
• Governments typically levy a one-off tax retrospectively over and above the normal rates of tax on such profits, called windfall tax.

 

Why windfall taxes are imposed by the government?

• Redistribution of unexpected gains when high prices benefit producers at the expense of consumers, 
• To fund social welfare schemes, and 
• As a supplementary revenue stream for the government, 
• As a way for the Centre to narrow the country’s widened trade deficit.

 

Why have countries all over the world started levying windfall taxes now?

• Prices of oil, gas, and coal have seen sharp increases since late last year and in the first two quarters of the current year, although having reduced recently.
• The increase stems from a combination of factors, including a mismatch between energy demand and supply during the economic recovery from COVID-19, further amplified by the Russian war in Ukraine.
• The rising prices meant huge and record profits for energy companies while resulting in hefty gas and electricity bills for household bills in major and smaller economies. 
  • E.g., the combined profits of Shell, Exxon Mobil, Total Energies, BP, Chevron Corp and Saudi Aramco went from $45.09 billion in Q2 2021 to $107.64billion in Q2 2022.
• Since the gains stemmed partly from external change, multiple analysts have called them windfall profits.

 

Why the imposition of windfall taxes is criticized? 

• Brings uncertainty in the market
  • Since windfall taxes are imposed retrospectively and are often influenced by unexpected events, they can brew uncertainty in the market about future taxes.
  • This may affect the future investment in the related sectors.
• Populist in nature
  • Many analysts believe that such taxes are populist and politically opportune in the short term.
  • The IMF advice note also said that taxes in response to price surges may suffer from design problems—given their expedited and political nature.
• Profits earned in such instances are reward for the risk taken
  • Companies argue that it is the profit they earned as a reward for the industry’s risk-taking to provide the end user with the petroleum product.
• Who should be taxed is another issue
  • Another issue is who should be taxed- only the big companies responsible for the bulk of high-priced sales or smaller companies as well.
  • This raises the question of whether producers with revenues or profits below a certain threshold should be exempt.

 

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Q1) What is meant by Aviation Turbine Fuel? 

Aviation Turbine Fuel (ATF) is dispensed from specially designed refuellers, which are driven up to parked airplanes and helicopters. Major airports have hydrant refuelling systems that pump the fuel right up to the filling outlets on the tarmac through underground pipelines for faster refuelling.

 

Q2) Is air turbine fuel kerosene?

Aviation kerosene, also known as QAV, is the fuel that fuels airplanes and helicopters equipped with jet turbines, turboprops or turbo-fans. Its main use is in commercial air transport.

 

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Source: Govt hikes windfall tax on crude oil, export of diesel, ATF  |  Live Mint  |  The Hindu