According to me, in this form of tax, the profit is not windfall but the tax is windfall for the tax authorities.

I have chosen to share some thoughts on this subject as the Government is looking at the prospects of levying such a tax on the huge profits being made by a leading corporate house in India.

Windfall Profit Tax is defined as a tax on profits that ensure from a sudden windfall gain. This tax will, in addition to the normal corporate tax, be payable by the business/industry on its profits.

In colonial times, the Crown proscribed use of any lumber with size more than one foot width. However this was relaxed when the trees were felled during a storm or heavy rains. So if one had a severe storm on her/his property and many trees fell, the resulting gain from such felled wood was termed as windfall profit.

Thus windfall profit can be treated as profit without any extra effort.

The governments all over the world have attempted or in some cases tempted to tax such windfall profits but with little success.

One can recall the federal legislation passed in United States of America in 1980 which taxed oil companies because of the ‘windfall’ profits they earned as a result of sharp increase in oil prices brought about by the OPEC oil embargo. But it was not met with wider acceptance and success and hence ultimately had to be withdrawn in 1988.

What is the logic advanced for such levy?

- It generates more revenue

- The tax proceeds can be used to take up/support R&D activities

- When the business/industry makes huge and unexpected profits, why not they share some profits by way of tax?

What is the logic advanced for its non-levy?

- It would be very difficult if not impossible, to arrive at the quantum of such windfall profit. Thus it would defy the tax canon – first compute correctly the windfall profit and then tax it.

- If one time levy could be imposed the industry would not mind it. Normally the Governments all over the world have the tendency to continue this tax under some pretext or other, even after the company/industry ceases to earn such huge and unexpected profit

- Such profits are earned only on account of the entrepreneurship shown by the company/industry and when they are prepared to pay or already paying normal tax, what is the need for this additional levy

- Company/industry should not be penalized for their decision making and efficient performance

What could be its possible impact?

- Pass through – In the long run, this tax levy could be passed on to the customer / consumer

- Certain percentage of profits is normally ploughed back into the back by way of fresh investment. If such profits are reduced by levy of the windfall profit tax, the funds available for investment would go down and naturally further capacity creation would be affected

- It will discourage entrepreneurship and risk taking

What could be its better alternative?

- One time levy when huge profits are made due to record business, unreasonable and unexplainable surge in prices

- If the government is so confident and competent let it run the business on its own and make such windfall profits

Well. Additionally, I would like to propose that on its own the company/industry which is making such huge profits, may assign certain percentage of such abnormal profits for some public benefit – like establishing world class academic institution or setting up of advanced medical facilities. In the process, the company / industry would get better mileage and appreciation from the market place. This percentage can be arrived at the company/industry level on its own or by mobilizing public opinion through public spirited not for profit organizations.

Thus, this tax with its present concept is not windfall profit tax; it is only a windfall for the tax authorities.