The term ‘windfall’ denotes an unexpected advantage usually an unforeseen financial gain. Windfall taxation is a tax levied by the government on those industries which experience profits that are above average or more than normal due to the prevailing economic conditions in the county. Similarly, windfall profits are those profits that a company ensues with no contribution of its but as a result of some external conditions. And when the government levies a one-time tax on such profits with a tax rate that is above normal, it is called Windfall Taxation. The motive behind imposing such a tax is to redistribute the excess profits of one sector to other sectors for the greater social good. Windfall taxes are also imposed on individuals or non-corporate entities in certain cases when they gain extraordinary profits. For example, the gains made in case of winning a lottery, unexpected inheritance of property, gifts, money earned from winning games, horse racing, gambling, etc.
HOW DOES WINDFALL TAXATION WORK?
Windfall Taxation is imposed by the government to bring down the prices of the goods to benefit the customers. The companies or the industries which ensue above-normal profits or windfall profits are taxed and the rising costs of the products being produced by these industries are put at a halt and the general price levels of the goods decline, benefitting the customers and also the government because of the amount collected through the taxation. Some oppose this taxation scheme while others favour it. The argument of those who favour it is that these taxes help the government in extra funding for the social projects and welfare of the society. While those who oppose it say that windfall profits should be allowed to be reinvested in the company itself for the holistic development of the business.
PROS OF WINDFALL TAXATION
Such taxation is aimed at encouraging the companies to lower the general price level of their products to provide relief to the customers from the extraordinary rise in prices. The taxed funds subsequently help in increasing the government’s revenue too. The funds collected can be invested in projects like building civil infrastructure or strengthening public health facilities. Investment of the windfall profits into gold deposits is also another viable option. Taxing of windfall profits of non-corporate entities helps in discouraging activities like horse racing, gambling, or others games where chances of winning are dependent on luck.
CONS OF WINDFALL TAXATION
Windfall taxation may lower the investment made into the companies because the profits left after deducting windfall profits are not worth investing in. Thus, the investors usually ditch the stocks of such companies before windfall taxation is imposed on them. Such a tax also discourages the companies from aiming for larger profits. Out of the most stocks sold in the UK in May 2022, the majority were of oil companies like Shell, BP, Glencore, Serica Energy, and National Grid as the UK’s chancellor announced windfall taxation on such companies. Investors started ditching the stocks fearing raids on the excess profits of the companies as the companies might degrade the shareholder pay-outs or the dividends to offset the taxation on excess profits.
WINDFALL TAXATION ABROAD
The case for Windfall Taxation started in 2005. It was a good year for bad corporations. It was a year marked by several corporate scandals. ExxonMobil, the US oil company, ensued windfall profits of more than $36 billion, as the rates of oil soared high in the aftermath of hurricanes Katrina and Rita. The profits were the highest ever earned by a company in a year. It was then that demand for windfall taxes was put forward. Though the demand was not paid heed to by the then Bush administration.
Recently, Rishi Saunak announced windfall taxation of 25pc on oil and gas profits for three years. While some favour the step, others accused him of throwing “red meat at socialists” for taking away the extra profits and reinvesting them in the ongoing “cost of living crisis” in the UK. The funds collected via the taxation would partially offset the 15 billion Euro relief package to support the households of Britain. The step came as the profits of some of the oil companies like BP sored highest in more than a decade as a result of the Russia-Ukraine conflict. Back in 1981, Margaret Thatcher had imposed windfall taxes on UK’s banks for ensuing windfall profits due to rising interest rates which in turn helped raise around 3 billion Euros. Last year, the government of Spain too imposed windfall taxes on energy generating companies to reinvest the collected funds in providing tax cuts to the customers.
CURRENT SCENARIO OF WINDFALL TAXATION IN INDIA
In 2018, those Indian oil companies which were being paid at international rates for the oil that they were producing domestically were under the scanner of being imposed windfall taxation for the extra profits that they were ensuing by no extra contribution of theirs. There were speculations in May 2022, that the Indian government might impose windfall taxation on oil companies as they benefitted recently from the high oil prices in the backdrop of the Russia-Ukraine war. But the air was cleared as a government official remarked that a ‘windfall tax’ goes against the policy of a ‘stable tax regime’ of the government. The government is more inclined toward allowing the companies to increase their capital expenditure rather than taking away their windfall profits to fund social schemes. This reflects the view of the government to attract more foreign investments for Indian companies.
Such a tax will always remain a debatable issue between the shareholders of companies and people of other sections of society. It is a given fact that most of the time when such a tax is being imposed it is imposed as a hasty decision. Because the unforeseen condition that is complementary to the windfall profits is always unexpected. Serious thought must be given to the fiscal and other implications of the tax before imposing it as a ‘knee-jerk’’ reaction.
Author(s) Name: Monika Sheoran (Rajiv Gandhi National University of Law, Patiala)