The Centre slapped a Rs 6 per litre tax on the export of petrol and jet fuel (ATF) and Rs 13 a litre on the export of diesel effective July 1, on the ground that refineries were making a windfall profit on such exports thanks to the price surge in international markets following ostracization of Russian oil by European countries.
Additionally, a Rs 23,250 per tonne tax was levied on crude oil produced domestically on the ground that such producers were being paid international parity prices for their crude, which too has surged following the breaking of hostilities between Russia and Ukraine. It smacks of wrenching away from the left hand what was given by the right.
Reliance, Vedanta and Rosneft-backed Nayara Energy, which chose to export rather than supply to domestic petrol pumps, are the worst hit. Apart from paying windfall tax, they have to supply to domestic petrol pumps at least 50 per cent of what they export. They prefer to export simply because PSU oil marketing companies have stopped rocking the consumers’ boat with relentless price hikes and these private parties simply cannot sell at a higher petrol bunk price in India.
A lot has already been done by way of number crunching on this score by various experts in the media. So, this article would steer clear of it and instead focus only on the limited issue of the rationale for and meaning of windfall tax.
The Indian hit-list
Etymologically, the term windfall originated from fruits falling from trees for wayfarers to pick up and feast on. In due course, the expression caught on to include any receipt of unexpected money. We in India have been imposing tax at the maximum marginal rate of 30 per cent without deductions or exemptions on receipts from lotteries, crossword puzzles, TV contests like ‘Kaun Banega Crorepati’ (KBC) and race horses. Crypto-currencies have joined this hit list recently.
Have we been selective in our categorization of windfall gains? What about the phenomenal stock market profits made by both traders and investors? Company promoters unload a substantial sliver of their holdings gotten cheap by riding piggyback on IPOs of their companies with Offer For Sale (OFS) for phenomenal profits. To be sure, the resultant profits are often contrived but have all the makings of a windfall.
Long-term capital gains from bourses are let off with just a slap on the wrist –10 per cent tax after a secular exemption of the first Rs 1 lakh. And short-term gains from bourses at 15 per cent. Market gains have a huge element of windfall. A salaried person who enjoys no such luck or windfall often coughs up a 30 per cent tax on his income exceeding Rs 10 lakh.
What about property appreciation over the years? A property acquired in 1964 for Rs 1 lakh in a prime location in Delhi now sells for Rs 15 crore. Far from terming it as a windfall and taxing it accordingly, our tax law showers exemption provided he reinvests the resultant long-term capital gains in another residential property within the prescribed time. Similarly, properties acquired in prime locations a long time ago, today fortuitously fetch mind-boggling sums as rent. They don’t attract the snide appellation windfall profits.
The truth is the government should not grudge a business its profits made the legitimate way given the fact that they are subject to vicissitudes both ways. Business cycles and aberrations are too well known to bear repetition. Oil prices have slumped in the past and they can slump again after the cessation of hostilities by Russia. Would the government bail the oil exporters out then so as to compensate for the fall in prices?
The UK government has imposed a 25 per cent windfall income tax on post-May 26, 2022, oil production profits in the country. India has in principle emulated its colonial master but has been cleverer in the nitty-gritty. The UK has chosen additional income tax to bludgeon the so-called windfall profits with. The Indian government has chosen excise duties and cess that are here and now. Had it been by way of additional income tax, the government would have to wait for the successive installments of quarterly advance tax and the full additional revenue would have been realized much later in the day. Furthermore, income can be manipulated or cooked but production cannot be unless oil can be produced or exported on the sly.
Former prime minister Indira Gandhi attracted flak for slapping a maximum marginal rate of 97 per cent (including surcharge of 10 per cent) income tax in 1971-72 at the height of her socialistic zeal. When the rich protested that they would rather not earn, she realized the stupidity of reviling profits and clobbering them with a heavy hand. The incumbent Modi government too must realize that whimsical taxes like windfall are not the solution to the nation’s inability to mobilize funds to run its gargantuan welfare schemes.
Need for forex
Resort to windfall tax was made after it attracted ire and flak for relying on fuel taxes to run its welfare programmes that hurt the poor more. But it should realize that petroleum products’ exports have got the country precious foreign exchange. Let us not lose sight of the fact that we need to beef up our forex reserves at a time when there is a surge in flight of capital from India thanks, among other reasons, to successive hike in the interest rates in the US.
Let us not lose in the swing what we have gained in the roundabout. And by the way, domestic crude oil production is just 15 per cent of the nation’s requirements. ONGC chairperson had promised to plough back the windfall profits in capex programmes rather than fritter them away. Domestic producers could have been offered a tradeoff — additional cess or plough back. The country needs to ramp up domestic production.
(The Federal seeks to present views and opinions from all sides of the spectrum. The information, ideas or opinions in the articles are of the author and do not reflect the views of The Federal)