The Hindu Business Line : Assessing windfall tax

In the past few weeks there have been many suggestions for imposition of windfall tax in the background of rising crude oil prices, which reached unexpected levels.

But the demand for such a tax has almost died down with the fall in international oil prices. This by itself shows that seriou thought was not given to the economic, fiscal, administrative and other issues concerning such a tax.

What’s windfall tax?

The term ‘windfall’ can be traced to colonial times. The Crown precluded the colonist population from using any lumber one foot or wider except where by act of God, such as severe storm, a tree fell in somebody’s property. In that event, the colonist could use such tree for his purposes. He could even sell it. If a number of trees fell this way, then the benefit could be substantial.

It would be wrong to suggest windfall tax merely because of unexpected boom in prices in a certain sector. Windfall profit/gain denotes unexpected profit/gain, usually sizeable, which could be the result of sudden rise in stock prices or increase in wealth consequent to, say, unexpected inheritance. From the point of view of investment, it could be said to be one-off gain that cannot be relied on to recur.

It is a gain or loss resulting from circumstances outside the control of the recipient.

The precedents

Such ‘once-only-tax’ was levied on British Privatised Companies in the Budget of 1997. It was 23 per cent payable in two annual instalments. Later, the term was extended to include other such taxes. There is demand for such a tax in Britain again.

In the US, such a tax has its origin in the first oil shock of 1980 when President Jimmy Carter signed a legislation taxing crude oil windfall. The tax was in the nature of excise duty ad valorem ranging from 15 per cent to 70 per cent of the selling price. President Ronald Regan ended the tax in 1988.

Venezuela is planning to have such a tax terming it as ‘excessive profit tax’. The Malaysian Government has announced a windfall tax on independent power production to ensure balanced distribution of income. China levied windfall tax on crude oil from 2006. Few other countries such as Indonesia are considering such a tax.

The windfall tax, as conceived and advocated, does not seem to be for taxing profits consequent to rise in prices but to tap the price rise itself over certain levels. In this sense, the proposal is not for taxing income but to provide for an indirect tax in the nature of sales tax or excise duty at higher flat rate(s) discarding the principle of progressivity in income taxation.

Appraisal of the proposal

Off-the-cuff suggestions on tax policies can be risky. Further, merely targeting a particular sector — oil sector, at present — cannot be justified. There would be contradiction in policy if the oil sector is both subsidised and taxed highly.

The proper course would be to make the oil sector bear part of the cost of subsidies when the prices are booming instead of subjecting it to windfall tax. The other course could be to cut down or eliminate exemptions in respect of industries earning bumper profits. High profits were taxed in the late 1940s by such enactments as excess profits tax and business profits tax, which remained in force for two years. Later, the Surtax Act and the Companies (Profits) Super Tax Act, 1964 were enacted and later withdrawn for valid reasons.

The equity angle

The issue needs to be examined from the angle of equity too. If super profits are to be taxed by measures such as windfall tax, then weighted deduction would be required to be thought of for ‘windfall losses’ as have been caused in recent weeks consequent to a steep fall in the Sensex and Nifty. There is no reason to follow the policy of ‘heads we win and tails you lose’. Such an attitude cannot be expected from the government’s side.

Bumper profits in real estate can be tackled by bringing progression in taxation of capital gains. The same policy can be followed in respect of income from business and profession, though doing so would distort the present reasonable tax regime.

Further, there is no reason that India too should have such a tax merely because other countries do.

Tax policies need to be stable if economic development and voluntary compliance are to be encouraged. The Chaturvedi Commission is reported to have made a recommendation for such a tax. Its report and recommendations need to be well debated before any decision to levy ‘windfall tax’ is taken.

(The author is a former Chairman of CBDT. blfeedback@thehindu.co.in)

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Lowdown on windfall tax
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