02 June, 2022

WHAT IS A WINDFALL TAX


Recently, the Government of United Kingdom had levied a 25% tax on the extraordinary profits of the Oil and Gas sector, known as the Windfall Tax. This is in addition to the regular tax that businesses have to pay.

 

“Windfall Tax is a tax levied by the governments on unforeseen or unexpected large profits of certain sectors.”

 

Due to present economic conditions, certain sectors of the economy may experience super-profits. For example, recent increases in crude oil prices have resulted in spectacular profits for oil and gas producing businesses, which have nearly doubled in the last year (May 2021: $60 per barrel; May 2022: $110 per barrel). Generally, governments take this initiative to channel the excess money in the hands of a few people in the economy into social welfare activities.

 

The UK has termed the windfall tax an “Energy Profits Levy”.  This is in addition to the regular tax of 40% (Ring Fence Corporation Tax – 30%; Supplementary Charge – 10%). So, the total tax on profits works out to 65%. However, there is also an Investment Allowance at the rate of 80% (reducing the Energy profits levy from 25% to 5%) to provide tax relief to taxpayers. This Investment allowance is only when the businesses invest in the oil and gas extraction in the UK. The Government is expected to raise £5 billion for the next twelve months from this tax. The government also introduced a sunset clause, effective at the end of December 2025.

 

India has not yet put forth any proposal of levying the windfall taxes on extraordinary profits of the Oil and Gas sector. The Government-controlled oil and gas companies have already distributed the extraordinary profits so earned in the name of the exorbitant dividends of which the government is receiving the lion’s share. So, the chances of levying Windfall taxes seem to be trivial.

 

                        

CA Ramakrishna Sanjay

 

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