What is a Windfall Tax

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Context:

The government recently slashed the windfall tax on domestically produced crude oil to ‘nil’ per tonne.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

Windfall taxes are designed to tax the profits a company derives from an external, sometimes unprecedented event — for instance, the energy price-rise as a result of the Russia-Ukraine conflict.
These are profits that cannot be attributed to something the firm actively did, like an investment strategy or an expansion of business.
- The U.S. Congressional Research Service (CRS) defines a windfall as an “unearned, unanticipated gain in income through no additional effort or expense”.
Governments typically levy this as a one-off tax retrospectively over and above the normal rates of tax.
One area where such taxes have routinely been discussed is oil markets, where price fluctuation leads to volatile or erratic profits for the industry.
There have been varying rationales for governments worldwide to introduce windfall taxes, from redistribution of unexpected gains when high prices benefit producers at the expense of consumers, to funding social welfare schemes, and as a supplementary revenue stream for the government.

Prices of oil, gas, and coal have seen sharp increases since last year and in the first two quarters of the current year, although they have reduced recently.
Pandemic recovery and supply issues resulting from the Russia-Ukraine conflict shored up energy demands, which in turn have driven up global prices.
The rising prices meant huge and record profits for energy companies while resulting in hefty gas and electricity bills for households in major and smaller economies. Since the gains stemmed partly from external change, multiple analysts have called them windfall profits.

-Source: The Hindu