Windfall Taxes: The Untold Story

Desperate times call for desperate measures, but these are tests of character and resolve to stay committed to the larger agenda.

<div class="paragraphs"><p>A technician opens the water valve ofa a pipe inside an ONGC gathering station on the outskirts of  Ahmedabad. (Photograph: REUTERS/Amit Dave)</p></div>
A technician opens the water valve ofa a pipe inside an ONGC gathering station on the outskirts of Ahmedabad. (Photograph: REUTERS/Amit Dave)

The Government of India recently announced and subsequently reviewed ‘windfall’ taxes on petroleum products. The official notifications imposing these steep excise and additional duties are silent as to the rationale except to state that the actions of the government are in the public interest and “circumstances exist which render it necessary to take immediate action”. If media reports are a guide, the real reason for the change in the status quo is the intent to shore up the revenue collections by diving into the profits made by the players in the oil economy. Apparently, this is to address the bulging fiscal deficit. One would argue that the petroleum sector is almost 90% public sector undertakings and hence these taxes are only a transfer of funds from one account of the central government to another. This version, however, severely discounts the larger messaging of the move and its potential conflict with national priorities.

At a policy level, the overnight introduction of the taxes, once again, highlights the stark absence of stakeholder consultation, which has been decried as an inviolable tenet by successive tax reform commissions. Pragmatically, one may wonder that if the centre has already decided to levy a tax would the consultation not be an empty formality? The answer is an unequivocal no. The introduction of the indirect-transfer tax and General Anti-Avoidance Rules–incidentally both being introduced in 2012 amending the income tax law–are clear illustrations of dangers associated with the act in haste repent at leisure approach. The efficacy of both these laws and their unintended ramifications resulted in subsequent review requiring multiple amendments in law. The occasion for repair (and also reputational damage) could have been avoided if those tax measures were introduced after stakeholder discussions.

Nonetheless, the hastily imposed 2020 Equalisation Levy and now the windfall taxes reveal that lessons, such as the recent withdrawal of retrospective amendments to the income tax law, are yet to be fully absorbed. One cannot overemphasise the role of stakeholder discussion as an inviolable tenet in a mature economic policy.

Message That Went Out At Home And Abroad

At a much larger level, one wonders about the messaging that these taxes convey, as also the question of fairness. Despite adopting a market-determination method for retail pricing of petroleum products, it is public knowledge how the petrol and diesel prices were frozen for months in the run-up to the recent assembly elections notwithstanding the losses incurred by the oil companies. In the wake of such heavy losses, business prudence dictates recovery by them when the time is ripe. However, the government’s approach to cash in the recoveries is like instituting a radical approach: partners in profit but strangers in losses.

The levy of windfall tax in India finds no developing country comparable, notwithstanding the harsh effects of the Ukraine crisis. In fact, the United Kingdom stands out as the only prominent illustration which has introduced such a levy. However, there is a glaring difference between India and the UK. Firstly, the UK tax is on profits and thus is an income tax, unlike India which has imposed excise duty.

Thus, the Indian windfall tax is likely to be passed on to the consumers, unlike the UK version which would rest with the oil producers.

Second, the UK became a net oil exporter in 2020, unlike India which imports in excess of 80%. Thus, Britain is certainly not the right inspiration for India to levy the windfall tax. In any case, despite a large number of allowances accompanying it, the UK windfall tax has also ignited a rethink about the future investment plans of major oil exportation companies in the UK. Unarguably, India can ill-afford prompting such investment-reversal thoughts given its energy self-sufficiency agenda.

One is also required to tackle the description ‘windfall’ which seems a convenient label to justify the new taxes. It whitewashes the economics of oil pricing and significantly impinges upon the sustainability of businesses. The central government directly receives a substantial part of the oil revenue in the form of production petroleum/profit-share, royalty and cess from the oil companies. Thereafter, sizeable excise duties and corporate taxes apply.

In such a background, one wonders whether there is any ‘windfall’ to begin with which requires intervention by the government in the wake of existing excessive taxes, and, more crucially, whether the imposition of such additional taxes would dampen the prospects for further investments which are crucial to increase domestic oil and gas production.

The government’s assurance of fortnightly review also does not dilute in any manner the fact that during the life of this levy there is a steering influence on the economic fundamentals of the oil companies. As a consequence, the levy interjects the new ‘Hydrocarbon Exploration and Licensing Policy’ which the Petroleum Ministry describes as a ‘win-win approach’ by specifically highlighting ‘no micro-management by the government’ and ‘full marketing and pricing freedom’ as its key tenets. Even in the past, the repeated commendations of the Petroleum Ministry to subsume petroleum products in the Goods and Services Tax regime have been to no avail. This calls for introspection about whether this development may prompt the global investors to doubt the solemn assurances of a stable tax regime and calls for ‘make in India, make for the world’.

The aforesaid discussion merely illustrates the long list of variables which require advertence and cannot be glossed over in the attempt to address the immediate objective of course-correcting the financial position. No doubt, desperate times call for desperate measures, but equally, these are tests of character and national resolve to stay committed to the larger outlined agenda of national growth.

Tarun Jain is an Advocate at the Supreme Court of India and a tax controversy expert. Views are personal.

The views expressed here are those of the author and do not necessarily represent the views of BQ Prime or its editorial team.