The Hindu Business Line : A ‘windfall’ best avoided

Apart from making a mockery of the claim that modest corporate tax rates lead to greater compliance, ‘windfall’ taxes could push the authorities into a legal quagmire.

The basic challenge facing the Government in acceding to the increasingly strident demand for a tax on ‘windfall’ profits is this: How is it going to establish, in a manner that stands the test of judicial scrutiny, that sections of the country’s oil sector benefited from some unexpected bounty? The aggrieved oil companies are certain to argue otherwise. They could be right. There is nothing remotely in the nature of an act of God in the additional profit s that upstream oil companies or independent refiners such as Reliance Industries might have earned for it to be deemed a ‘windfall’. Quite the contrary. Consider this: Liquidity had built up gradually to a point where there was such a surfeit of it in the global financial system — far more than was considered good for the global economy — that some of it found its way into commodities, in general, and oil, in particular.

Then, there is the phenomenon of robust growth in emerging economies such as India and China, which put additional pressure on the already fragile equilibrium between forces of demand and supply in crude. Indeed, smart global money had actually bet on high crude prices and profited from it. The upstream oil companies could, therefore, argue that they simply happen to be profiting from the present boom in a boom-bust cycle in prices that is all too common in commodity markets. If, on the other hand, the expression ‘windfall’ is just a euphemistic way of describing a phenomenon of ‘excess profits’ relative to some normative notion of profitability, the Government is faced with an altogether different challenge. Such a tax on ‘excess profits’ ought to cover companies in other industries with a similar record of performance and not just the oil sector. That, in effect, means an attempt at imposing an economy-wide tax on ‘super’ profits and a higher rate of tax over and above the rate applicable to ‘normal’ profits.

Not only does this make nonsense of the Government’s claims of modest rates of corporate taxation bringing in better compliance, it seeks to fundamentally alter the structure of corporate taxation itself. ‘Windfall’ tax or ‘super’ profits tax, or such a tax by any other name is, in the final analysis, nothing but an attempt at introducing differential rates for varying slabs of corporate incomes when corporate taxation has traditionally relied on single flat rate, which is as it should be. But integrating all kinds of incentives aimed at promoting export-oriented units or infrastructure projects, etc., into a radically different tax philosophy is going to be a drafting nightmare for the bureaucracy. As political rhetoric goes, demands for such tax measures may be fine. But they may neither pass legal muster nor correct the fiscal imbalance. The Government is better off not getting into this legal quagmire.

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