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Context:

The government removed the windfall gains tax on domestic crude oil production and the export of diesel, gasoline, and aviation turbine fuel (ATF).

What is a windfall tax?

A windfall tax is a tax imposed by the government on industries that generate unexpected and significant profits as a result of extraordinary circumstances, such as geopolitical disruptions or natural disasters.

These taxes are normally imposed on industries that benefit from a sudden surge in demand or supply disruptions, which results in a significant increase in profits.

Windfall taxes may also apply to individuals who receive a large sum of money as a gift, inheritance, or from winnings in a game show, gambling, or lottery.

Why did the Indian government introduce the windfall tax?

The windfall tax was introduced by the government in July 2022 in response to the sharp increase in global crude oil and fuel prices resulting from Russia's invasion of Ukraine. Domestic oil producers gained from selling crude oil at internationally benchmarked prices.

The tax aimed to reduce excessive exports and ensure adequate domestic fuel supply and also increase government revenue.

What taxes were imposed as part of the windfall gains tax on the oil industry?

Special Additional Excise Duty (SAED) on domestic crude oil and aviation turbine fuel (ATF) exports. Road and Infrastructure Cess (RIC) on diesel exports. These tariffs were imposed to take advantage of excess profits made by oil producers and fuel exporters.

Why was the windfall tax scrapped in December 2024?

The Union government abolished the windfall gains tax after global oil and fuel prices stabilized following the increase resulting from the Russia-Ukraine war. Also, the fuel supply in India is abundant, and the tax has not generated much income, with the rate already reduced to zero for essential fuels and local oil output.

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WINDFALL TAX

Source:

Indian Express

PRACTICE QUESTION

Q.Consider the following statements in the context of the Windfall Tax:

1. It is imposed on entities that receive unexpected and significant financial benefits.

2. The objective is to raise funds for the greater social good.

Which of the above statements is/are correct?

A) 1 only

B) 2 only

C) Both 1 and 2

D) Neither 1 nor 2

Answer: C

Explanation:

Statement 1 is correct:

A windfall tax is a tax imposed by governments on specific industries when economic conditions allow them to generate significantly higher-than-average profits. India imposed it on domestic crude oil production in July 2022, and withdrew in December 2024.

Statement 2 is correct:

The main objective of windfall taxes is to allocate a portion of these extraordinary profits to the public good. Governments argue that these profits are not only due to the effort of the taxed entity, but mainly due to external factors, which justify the redistribution of such gains for the benefit of society.