When a company benefits from something that they are not responsible for, the financial gain that ensues is called windfall profits. Take the example of three of Indian upstream oil companies — ONGC, Oil India and GAIL. All three declared all-time high net profit in the fiscal year 2021-22. ONGC said its net profit grew by 258 per cent to reach ₹40,306 crore. Oil India announced net profit of ₹3,887.31 crore, which is 123 per cent higher than in the preceding year. GAIL reported a 112 per cent surge in its net profit, at ₹10,364 crore. This was possible as crude oil and gas prices shot up due to the Russia-Ukraine conflict.
Governments, typically, levy a one-time tax over and above the normal rates of tax on such profits and that is called windfall tax. As the government has recently gone for cut in Central Excise Duty and considering that it is spending more on food and fertiliser, the big question is how the gap will be fulfilled? And one of the solutions could be levying a windfall tax on oil companies.
Who pays it?
Tax on income is paid by those who earn it. So, in this case, oil companies will be required to pay, if levied.
Which are the countries that have imposed it after the sharp surge in oil prices due to the Ukraine-Russia conflict?
Italy and the UK are two key economies that have levied windfall tax. Early in May, Italy announced taxing the profits of energy companies at 25 per cent to help fund a support package for consumers and businesses that have been hard-hit by soaring energy costs. The tax is a hike from an existing 10 per cent windfall tax imposed in March on the profits of energy companies. Prime Minister Mario Draghi has budgeted almost €30 billion ($31.13 billion) since January to help offset rising electricity, gas and petrol prices, as the war in Ukraine overshadows the growth prospects of the euro zone’s third largest economy.
On May 26, UK Chancellor Rishi Sunak announced a new tax on the profits of oil and gas companies operating in the UK and the UK Continental Shelf. It will increase the headline rate of tax on those profits to 65 per cent from 40 per cent. It will apply to profits arising on or after May 26, 2022. It is temporary and will be phased out when oil and gas prices return to normal levels.
A Bill is being introduced for an ‘Energy Profits Levy’ and it will also include a sunset clause, which will remove the tax after December 31, 2025. It is expected to raise around £5 billion over the next year which will go towards supporting people with the new cost of living measures announced by the Chancellor.
Is India considering such a levy?
There have been unconfirmed media reports about windfall tax being considered at the highest level. While there is no formal denial from the government, upstream oil companies have said they have not heard anything on this.
Will such a tax increase price of fuel?
Very unlikely, as this tax is not part of the input or output cost, but levied only on profit.