Windfall Gain Tax : The Legality?


The basics of windfall gain tax go back to the idea that no entity should be ideally allowed to benefit from favourable market behaviour. These behaviours can be simulated due to any number of reasons, mostly which are not in the control of the companies gaining from such events. A current example of such event is the ongoing conflict in Ukraine, which has heavily affected the prices in the energy sector. These taxes are generally retrospective in nature, and are above the normal rates of taxation, on the profits gained by the companies, due to favourable market behaviour. Oil and Petroleum industry is a very common sector where such taxes have set a precedence over the years all around the globe.

The Legality?

The government of India has started to impose windfall gains tax on the profit made by the Indian Oil companies during the unusual benefits mainly derived from the disturbances in geopolitical situations. But an interesting question arises that are such imposition of taxes legal, or to the very least compliant with the laws in place. Windfall gains tax, termed as Special Additional Excise Duty (SAED) by the government has invited mixed reactions from different sections, and even the Oil ministry wanted certain exemptions, however the government is well within its powers to impose such taxations. The current imposition is subject to a fortnightly review, and is being regularly reviewed. The answer to the question about legality becomes important as, the term “gaining profit from unusual market behaviour” is very subjective, and although no specific legislation in India currently enables this exact matter, it is fair to say that government is well withing its powers to make such legislation and rules on taxation under Article 265 of the Constitution of India.

The United States has been imposing such taxes from the early 1980s however the mechanism proposed there was different. It charged windfall tax as an excise tax, and that was a percentage of the difference between the price of oil and a base price indexed for inflation. The mechanism which is being used to impose such windfall tax in India is however not clear from the notifications issued by the government.

The major question when talking about windfall gains tax is the mechanism and the rationale which is being applied for such imposition. They validate or invalidate any such situation which may be arising out of this. India is not the only country to impose such taxes this year, many other countries have taken up this matter, and are imposing such taxes, as the economy still is recovering from the pandemic. An IMF paper states that “The increase stems from a combination of factors, including a mismatch between energy demand and supply during the economic recovery from COVID-19, further amplified by the Russian war in Ukraine.” This rationale does not seem to be enough as imposition of such taxes might set a precedence, which would mean that such imposition could happen in future in other sectors too, and since the “unusual market behaviour” is very subjective term, it might lead to some fallacies. It thus becomes essential for the government to approach the situation with caution due to various reasons where analysts have questioned the idea behind such taxation.

Investors generally find those countries lucrative where the mechanisms, and even rates for that matter for essential items, such as the energy sector is stable. Such stability allows investors to wisely use their resources. A stable and certain tax regime ends up as the winner even when a country has lesser rates of taxation but highly unstable. And windfall taxes have generally been imposed in retrospective manner which is also discouraging for the investors at large. The whole idea as mentioned earlier is based on certain unexpected events creating a favourable market behaviour, but unless a strict mechanism is in place to deal with them it is difficult for businesses to get a definite idea of the repercussions of such events. Various reports and economists have said that a clear picture of what would the tax regime be like. In order to avoid abrupt one-time surprises in the tax system, it is preferable to declare in advance how much tax you will impose in certain situations. IMF also has warned about the sudden changes in the prices “may suffer from design problems – given their expedited and political nature.”

Even when the U.S. imposed a comparable tax on domestic oil corporations in the 1980s, the amount of money the government received was far lower than expected, and domestic oil output was also decreased while imports rose.

These taxes are often related as a short-term political move in nature, and therefore may deter people from making investments considering the uncertainty. All of the above factors would lead a country to slow economic growth, and businesses would be willing to transfer to different places. Another issue is the idea that retrospective windfall taxes are unjust; in other words, businesses should be informed in advance of the tax laws so they may make decisions about how to behave rather than having their lawfully obtained earnings being taken away.

However, windfall tax as idea is still legitimate as you can charge the businesses which have gained unusually due to certain market conditions. A windfall is when there are rapid price increases, and they may be unforeseeable but since they have gained due to circumstances beyond their control, they should be ready to pay the taxes. It is only the mechanism, or the definitions of what constitutes as ‘windfall’ and what are unusual market ‘circumstances’ in question.

Also, the retrospective nature of the tax is not necessarily bad as it solves the issue of uncertainty to some extent where businesses already know what and how much of taxes, they might be liable to pay, as sometimes it is very easier to identify the favourable situation of the market. This also means that the loss to exchequer is minimised, as, unlike with a yearly tax that is stated in advance, businesses cannot alter their behaviour to lower their tax due (for example, by cutting production).


Since the tax is being levied on companies which ideally have not gained profit from their hard work although their risk-taking mindset is involved, it sometimes is not fair to say that their earnings are being cut down, and at the end society would only be benefitting from the same. Entry 84 of the Union list empowers the government to make laws on excise on goods manufactured in India, including petroleum products. The government although well within the right to impose such windfall gains tax, has to make the rationale and mechanism clear about such imposition. This ensures that the concerns of various sections are answered and if an issue arise that could be dealt in a prescribed manner.

Author: Ankesh, a Student of National Law University Odisha, in case of any queries please contact/write back to us via email to or at  Khurana & Khurana, Advocates and IP Attorney.

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