Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
Popular Search: ACCOUNTING STANDARD :: TAX RATES - GOODS TAXABLE @ 4% :: ACCOUNTING STANDARDS :: form 3cd :: VAT RATES :: ARTICLES ON INPUT TAX CREDIT IN VAT :: cpt :: empanelment :: articles on VAT and GST in India :: TDS :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: VAT Audit :: list of goods taxed at 4% :: due date for vat payment :: Central Excise rule to resale the machines to a new company
« Service Tax »
 Service tax officials transferred for favouring realtor
 GST, a challenge and opportunity for accounting professionals’
 Service Tax On Hotels And Restaurants – Recent Delhi High Court Judgment
 GST Council discusses 4-tier tax rate, cess on demerit goods
 Why you shouldn’t miss these three simple tax saving options beyond Section 80C
 Determination of value for transactions between the Related parties under GST Laws.
 Higher collections can offset GST losses
 GST to subsume over a dozen Central, State taxes
 Incidence of indirect taxes won't go up under GST
 Advanced Budget date: Absence of a GST rate may present estimation challenges
  Tax queries answered by Dilip Lakhani, Senior Chartered Accountant

5 reasons why windfall profits tax is wrong
July, 17th 2008

A day after Reliance Industries [Get Quote] chairman Mukesh Ambani met Prime Minister Manmohan Singh to forestall political attempts to throttle his oil refinery business, the petroleum ministry has come out with a detailed presentation to show that the demand for the windfall profits tax (WPT) on private oil companies is 'short-sighted populism' and 'bad economics.'

The ministry claims that WPT would neither help in reducing prices of petroleum products nor would it lead to any increase in output. WPT could lead to lower investment in the petroleum sector and undermine India's energy security, the presentation cautions.

Concerned that the WPT would make investment and production by the domestic oil companies more expensive, the ministry says these companies should be incentivised to go in for drilling and that any deterrent will slow down any research that could help make future energy in the country less expensive.

In a note, prepared in response to first the Left and now the Samajwadi Party leader Amar Singh's demand for windfall profits tax, the ministry has given five reasons why such a tax defies logic. These are:

    * India is neither a major oil producer nor Indian companies have gained much from the rising global prices of oil.
    * The government is bound by the contract of the production sharing agreement as part of the NELP (New Exploration Licensing Policy).
    * As part of the profit sharing plan, the government is already a beneficiary of the rise in profits of oil companies, besides 35 per cent corporate tax on such profits.
    * WPT on the basis of revenues in discovered blocks ignores the huge risks, investments and poor chances of discoveries.
    * WPT will discourage long-term investments in oil industry.

The ministry points out that all over the world discerning opinion leaders see windfall profits tax as no more than a populist political tool designed to make people feel good.

The ministry's note asserted that the clamour in India for such a tax is based on the misleading logic that the rising prices of oil across the globe has helped the oil companies make profits far in excess of what they legitimately deserve.

What about the profit margins in other businesses during boom periods, the ministry asked, and pointed out that nobody sought a windfall tax on India's software majors when they gained bumper profits from the upsurge in the global IT industry.

It said votaries of the windfall tax have chosen to ignore certain basic facts like the oil companies pay tax in all its myriad forms and the business being cyclical in nature has also seen these firms go through slumps.

It said the refining business that the votaries of WPT want to attack is also highly cyclical. As new capacity comes on-stream, refining margins decline precipitously. Not to be forgotten is the fact that the refining industry has to invest heavily in technology, upgradation and research to produce cleaner fuels, the note added.

The ministry pointed out that India has stagnated for decades in the production of oil and gas with 70 per cent of its requirements being met through imports and hence the government adopted a production sharing contract to attract investments. It includes royalty to the government and as such the government is getting higher royalty from increase in the oil and gas prices.

The ministry has also recalled how windfall profits tax has been a tried and failed concept in the United States that enacted such a tax in 1980, only to repeal it in 1988 because it was an administrative burden on the Internal Revenue Service, a compliance burden to the oil industry, and made the US more dependent on foreign oil as realised in hindsight.

"One of the unfortunate fallouts of WPT (in the US) was that it had the effect of reducing domestic supply of crude oil below what the supply would have been without the tax," the ministry noted, pointing out that WPT clamped as an excise tax would increase the production costs, reduce domestic oil production and increase the level of imports that are already as high as 70 per cent and are threatened to climb to 90 per cent by 2010.

"Moreover, to say that recent increased profits in the oil sector are a windfall is probably not fair. They are the reward for the risks the industry takes to provide petroleum products to consumers. When profits increase, the government revenues increase simultaneously because income tax -- federal, state and local -- is paid on higher profits. Thus, even without a windfall profits tax, the government's tax revenues would increase commensurate with any oil industry windfall."

The ministry also warns about the negative effects on the country if WPT is clamped -- like forcing companies to seriously look at alternative investments, it jeopardises investments in high-risk exploration businesses.

Home | About Us | Terms and Conditions | Contact Us
Copyright 2016 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - Careers

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions