What is Windfall tax: A Tax on unprecedented Success?

Pranav Chadha is a third-year B.A., LL.B. (Hons.) student at Rajiv Gandhi National
University of Law, Patiala

1. What is windfall tax

Recently, the Indian government reduced the windfall tax for domestically produced
petroleum to Rs 5,700 per metric ton from Rs 8,400. The government here increased the
windfall tax for crude oil while reducing it for aviation turbine fuel. The government of India
introduced a windfall tax in July 2022 to extend the levy on the export of diesel, gasoline, and
aviation fuel by the private players in India to overseas in which resulted into unprecedented
profits. Unpredicted changes in big industries' profits sometimes occur due to unprecedented
events. A tax is levied on the high unpredicted profits of sectors on the condition that the
profits did not result from an industry's business strategies.

2. History of Windfall Tax

The windfall tax may sound colonial but the USA enacted it by then-president Jimmy Carter
in the 1980s as a temporary excise duty on the domestic oil industry to adjust the extremely
high unpredicted profits resulting from an unforeseen profit boom to the government’s
revenue. However, this policy cannot be seen as a success because the revenue project The
WFT revenue was projected at 300 billion USD but only resulted in 80 billion USD in 10
years (1980 to 1990). this taxation policy also increased the dependence on the foreign oil
industry In the United States as per the research conducted by Philip K. Verleger, Jr. ( Philip
K. Verleger, Jr. Senior Research Scholar School of Organization and Management Yale
University) in “An Assessment of the Effects of the Windfall Profits Tax on Crude Oil
Supply”. And this system was reversed back by the US Senate in 1988 by 58-40 voting.

However, for India, the windfall tax is a new concept it was introduced by the government of
India in 2022 with a new name “Special Additional Excise Duty (SAED)” on the same tracks
as other countries that are also introducing windfall tax on the energy sector due to the rise in
the energy sector recently. The main motive of the Indian government seems to discourage
oil producers from selling oil overseas rather than in the Indian domestic market due to
unprecedented increases in profits in the international markets.

3. Weighing the Windfall tax on the pro and con side

The benefit of the windfall tax directly goes to the government. the companies earning the
unpredicted high profits have to cut their share and give it to the government, the
government overcomes the economic losses but the windfall tax should be reasonable and
may help in economic growth.

It can also be logically reasoned that the unanticipated higher profits could not be on the
strategic budget of the company for investment or any future decisions, so the Windfall
tax can be applied without restraining the company’s ability to maximize profits. Since
the profits have arisen out of the control of the enterprise, they should be taxed.

But the other aspect of the windfall taxes is that it is a tax on the ability to invest, People
say that there should not be a tax on the extra profits of the companies so the companies
could save more for future endeavors.

In India and all over the world, Historically oil prices are subject to variations from time
to time, for example, the international prices of crude oil changed rapidly, from $23 per
barrel (bbl) in 2002 to $36/bbl in May 2004 to $107.97/bbl during 2012-13, So, the
referring to the above-mentioned reasoning, it cannot be said that the unprecedented oil
prices cannot be into the investment decisions, but actually, the increase in the oil prices
could are anticipated by most companies, it may become a burden when they are taxed
upon the profits that are not unanticipated but anticipated to be surge anytime.
 4. Conclusion

The Indian government's recent adjustments to the windfall tax on petroleum products aim to
address market volatility and enhance fiscal stability. By lowering the tax on domestically
produced petroleum and raising it on aviation turbine fuel, the government seeks to manage
the exceptional profits from exporting diesel, gasoline, and aviation fuel. Introduced in July
2022 as the Special Additional Excise Duty (SAED), this tax targets profits arising from
unpredictable market conditions rather than strategic business activities.

The windfall tax provides significant revenue to the government, helping to offset economic
losses and support public finances. Since these profits are unexpected, taxing them usually
does not impact a company's planned investments. However, there are concerns that taxing
additional profits may reduce a company's capacity to reinvest and innovate. Given the
historical volatility of oil prices, companies might anticipate price increases and incorporate
them into their strategies. Thus, taxing what could be anticipated profits might burden
companies and hinder growth.

In conclusion, while the windfall tax helps redistribute extraordinary profits, it must be
managed carefully to avoid discouraging investment and innovation in the energy sector.
Balancing these aspects is essential for maintaining both government revenue and industry
growth.