What is the Windfall Tax?

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Overview:

India cut its windfall tax on petroleum crude to 1,700 rupees ($20.53) a tonne from 2,300 rupees a tonne, according to a recent government notification.

About Windfall Tax

  • What is it? It is a tax levied by governments against certain industries when economic conditions allow those industries to experience significantly 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. 
  • When is it imposed?
    • When the government notices a sudden increase in an industry's revenue, they impose this tax.
    • However, these revenues cannot be linked to anything the company actively pursues, such as its business strategy or expansion.
    • Rather, it is related to a one-off external event for which the business is not responsible. 
    • Consequently, a Windfall Tax is imposed on an industry's profits when it experiences a sharp increase in revenue due to unrelated external events.
    • A recent example is the sudden rise in the profits of the oil and gas industries due to the Russia-Ukraine conflict. 
    • The unexpected windfalls are taxed by the government over and above the normal tax rates.
  • The most common industries that fall target to windfall gains tax include oil, gas, and mining.
  • Purpose:
    • Redistribution of unexpected gains when high prices benefit producers at the expense of consumers;
    • To fund social welfare schemes;
    • As a supplementary revenue stream for the government;
    • As a way for the Government to narrow the country’s widening trade deficit.

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: Govt cuts windfall tax on crude petroleum to Rs 1,700 a tonne effective Tue