Explained | Taxing windfall profits of oil companies

Source: The post is based on the article “Explained | Taxing windfall profits of oil companies” published in The Hindu on 16th February 2023

What is the News?

The Union government has hiked the windfall profit tax levied on domestically-produced crude oil as well as on the export of diesel and aviation turbine fuel(ATF). 

What are Windfall Profits?

‘Windfall profits’ refer to an unanticipated spike in earnings of an entity resulting from an exogenous event (which could be one-off and/or prolonged) and not resulting from a business decision. 

The B.K. Chaturvedi committee’s report on the Financial Position of Oil Companies (2008) stated that taxing these windfall gains has been seen as a prerogative of governments, in part to meet social needs and in part to pursue redistributive justice. 

The central idea here is for sovereigns to capitalize on the lofty profits made by the entities and use it for specific domestic pursuits, for example, spur collections (of taxes) to guard against the consequences of a larger geopolitical event or redistribute them for it to be used for domestic social service schemes, among other reasons.

What led to the windfall gains for oil companies?

Russia’s actions in Ukraine were central to the volatility observed in the oil market in the previous calendar year. 

For perspective, Russia was among the major players in the global oil market and among the largest producers alongside Saudi Arabia and the U.S. As a response to Russia’s actions, several Western countries moved to stop or curtail their energy imports from Russia.

This led to sharp increases in fossil fuel prices as countries went to look for other suppliers for their energy needs, culminating in major profits for oil companies.