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Windfall Tax is an additional tax rate, levied by Government, on unexpected profits earned due to sudden windfall gain from an events which are outside the control of a company or industry. Windfall tax is imposed on certain section of companies or industries viz. petroleum, natural gas etc. due to favourable price situation arises on account of war, pandemic, commodity shortage or any other event which drive the product prices higher.

The word Windfall tax was initially used when the Federal Government in April 1980 enacted the Crude Oil Windfall Profit Tax Act as a part of compromise between the Carter Administration (then the President of US) and the Congress over the decontrol of crude oil prices. The main purpose of the tax was to recoup for the federal government much of the revenue that would have otherwise gone to the oil industry as a result of the decontrol of oil prices. Despite its name, the windfall profit tax (WPT) was actually an excise tax, not a profits tax, imposed on the difference between the market price of oil and an adjusted base price. Thereafter other countries have also introduced the concept of Windfall Tax on various industries who made phenomenal profits due to favourable change in domestic or global market conditions.

In India, before July 2017, excise duty was levied by the Central Government on excisable goods which were produced or manufactured in India. There were three types of excise duties in India (a) Basic Excise Duty, which was levied on all excisable goods apart from salt, manufactured or produced in India; (b) Additional Excise Duty, which was levied on certain goods of special importance under Additional Duties of Excise (Goods of Special Importance) Act, 1957; (c) Special Excise Duty, which was levied on special goods classified under the Second Schedule to the Central Excise Tariff Act, 1985.

The Central Sales Tax Act, 1956 had declared some Goods as of special importance like crude oil, Aviation turbine fuel, coal, cotton etc. on which the Act places restrictions and conditions in regard to powers of State Governments to impose tax inside the State. In July 2017, the Government introduced the Goods and Service Tax (GST) Act, 2017 by subsume multiple taxes (both Central and State taxes) into a single tax on supply of goods and services. When introduced, this tax was applied on all goods and services except Alcohol for human consumption and GST on five specified petroleum products (Crude, Petrol, Diesel, ATF & Natural Gas) would be applicable from a date to be recommended by the GST council. In addition, the Centre would have the power to levy Central Excise duty on these products.

Presently the central excise duty comprises a Basic Excise Duty, Special Additional Excise Duty and Additional Excise Duty applies only on petroleum and liquor. Further, the Centre has exempted “supply of electricity” and “Transmission or distribution of electricity by an electricity transmission or distribution utility” under GST as per the Notification No.2/2017-Central Tax (Rate) and Notification No.12/2017-Central Tax (Rate) dated 28th June, 2017 respectively. Till date 48 meetings of GST Council have been held and no decision have been taken to cover petroleum, liquor, electricity within the ambit of GST as these are big source of revenue for the Centre as well as States.

In the early 2022, with slowing global growth, continuous Russia’s invasion of Ukraine, pandemic effect has led to sharp rise in crude oil prices globally due to which exceptional gains were made by domestic crude oil producers and refiners. As the Centre has power to levy duty on these items and after being satisfied to do so in the public interest, the Central Government for the first time had imposed “Special Additional Excise Duty (SAED)”, which is commonly referred to windfall tax, vide Notification No.04/2022- Central Excise and 05/2022- Central Excise dated 30th June, 2022. At that time, duty at the rate of Rs 6 per litre (USD 12 per barrel) each was levied on petrol and ATF and Rs 13 a litre (USD 26 a barrel) on diesel and Rs 23,250 per tonne (USD 40 per barrel) on petroleum crude. The Central Government contention of imposing windfall tax was that crude prices have risen sharply in recent months and the domestic crude producers sell crude to domestic refiners at increased international prices resulting in windfall gains to domestic crude producers. Further, exports were becoming highly remunerative and it has been seen that certain refiners were drying out their pumps in the domestic market to reap the benefit of exceptional gains due to higher global prices.

It appears that the sense for introducing windfall taxes by worldwide Government is to mitigate the impact of mismatch in demand and supply in their domestic market leading to inflation, trade deficit etc.; to generate additional source of income and bridge the gap in Government’s spending and revenue; to fund social welfare schemes of Government.

In Sep 2022, the Government has clarified that crude oil prices have witnessed extreme volatility in 2022. This has resulted in very high prices for end consumers at petrol pumps. Countries around the world have implemented various measures to mitigate the adverse impacts on consumers. “Windfall tax” is one of the measures which helps in dealing with the situation.

Since July 2022, the Government has curtailed windfall tax rates by 91% to Rs.2100 per tonne on petroleum crude, 25% to Rs.4.5 per litre on aviation turbine fuel, 42% to Rs.7.5 per litre on diesel, however it is nowhere defined at what levels of unanticipated profits this windfall tax is applicable. Well, till the time Government is having this additional revenue, this flexible windfall tax will continue to be wax and wane depending on market conditions.

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May 2024