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Introduction: The concept of windfall tax often surfaces during economic discussions, especially concerning industries like oil and gas. Recently, India introduced windfall tax regulations, sparking debates and discussions. Let’s delve deeper into what windfall tax entails and its implications.

I am sure many of you would have come over article “Government of India slashes windfall taxes on petroleum crude”. But what exactly is windfall tax and who pays windfall tax and why to pay such tax. After the countries like UK and Australia, the government of India has imposed a windfall tax on oil and gas companies who are involved in either production or distribution of oil and gas.

To understand more clearly, let’s assume, XYZ ltd. is a company engaged in oil industry, and has purchased oil from United Arabs of Emirates (UAE) for 100$ per barrel, now due to some international issues the United Nations has imposed sanctions on UAE, and UAE is selling same oil now for 110$, due to which the price of oil will be increased in international market and will result into increase in price of petrol and diesel for public, since these prices are decided on basis on international price of crude oil. Here the profit of 10$ is windfall gain for companies, as the management of company was not involved in any activity which made them profit of 10$, it was an unforeseen event. So basically, any tax on profit made due to any un-controllable economic conditions are termed as windfall tax.

But why such taxes only on oil and gas industry? India is dependent on other countries for almost 80% of its total oil consumption whereas, the Indian companies booked huge profit by exporting the oil extracted from India. The government in order to control prices in India and to promote supply of oil within country has imposed windfall tax.

The traces of windfall tax in India go back in 2008, during the recession period when prices of crude oil were increased, the government then also considered to impose windfall tax but the government failed to do so due to opposition of private sector firms. But the present government has introduced windfall tax in India with effect from 1st July 2022. The application of windfall taxes have been opposed by market giants ONGC who were of view that government have gained profits from purchasing oil from Russia at discounted price (due to Russia-Ukraine conflict) as compared to international price.

Conclusion: Windfall taxes, though contentious, serve as a mechanism to regulate industries and ensure fair practices, particularly in sectors like oil and gas. As India navigates its energy landscape, the imposition of windfall taxes reflects the government’s efforts to balance economic interests and public welfare.

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June 2024