Why India should tax firms profiting from Ukraine war – Times of India

Clipped from: https://timesofindia.indiatimes.com/business/india-business/why-india-should-tax-firms-profiting-from-ukraine-war/articleshow/92019070.cms

The story, which was first published on June 5, 2022, has been updated
The Ukraine war caused crude oil prices to shoot up by almost 100%. This meant that oil producers’ revenues doubled, even though their cost did not change by much. Crude oil comes from mother earth, and is a simple technology of extraction. Like plucking fruits off a tree. The cost remaining the same and revenues doubling means a hefty increase in profit.
The war and the consequent disruption in oil supply from Russia, with geopolitics thrown in (the boycott of Russian oil), caused an oil shortage, which led to the price spike.
Oil markets are notorious for such volatility or rather fickle behaviour of prices. Even a perceived 2% shortage in oil supply can cause prices to swing by 10% or 20%. That’s because the demand for oil is unchanging (economists call this demand ‘inelastic’). So, any shortage can give a huge advantage to oil producers.
It’s not different from how you would behave if you learnt that there is an impending shortage of insulin or metformin (the diabetes drug). Since demand is inelastic, any shortage of this crucial drug would send prices soaring, or worse black marketing. Remember the shortage of Remdesivir or oxygen during the second wave of Covid in India?

But unlike medicines and drugs, which have price caps, the oil market is not regulated. So, there are no price caps. The government tries to protect the public from rising petrol and diesel prices by tinkering with excise duties and value-added taxes.
But wait a minute. Since the government anyway has to use its resources (i.e. tax revenues) to ease the pain of rising oil prices by reducing excise duties (i.e. foregoing tax revenue), why not look at taxing oil and gas companies? They are enjoying windfall profits.
These are profits due to global disruption caused by the Ukraine war and are not due to any investment done by the companies. Nor is the increase in profit from any adoption of new technology. It is as if they are benefiting from their good luck.
Under normal circumstances, any risk-taking businessman should be allowed to benefit from good luck or bear the burden of bad luck. There are normal ups and downs in the business cycle, and only risk-taking entrepreneurs and industrialists have the guts to take these risks.
But these are not normal times. And the windfall profits are huge. British company BP’s profits doubled in the first three months of 2022 (the war broke out in February). And Anglo-Dutch company Shell saw its profits grow by three times in the same period. Hence, the UK government has decided to impose a windfall gains tax on oil and gas companies.

British oil & gas major BP’s profits doubled in the first three months of 2022

This will fetch an estimated £5 billion, which will go a long way in funding the extra £19 billion that the government intends to spend to ease the pain of higher energy bills. This fiscal spending will be in the form of direct cash transfer to all poor and lower-income households.
Remember the UK has a Conservative government led by Prime Minister Boris Johnson, whose party is allergic to higher taxes. If their party can support such a windfall profit tax, surely India too can think of the same? After all, the fiscal deficit has been soaring in India, and the debt-to-GDP (gross domestic product) ratio has climbed all the way to 90% from just 60% in pre-Covid times.
The government needs to explore all sources of taxes. Just like the oil and gas industry that has benefited from price spikes, so have other commodities like steel. (That is why India imposed a ban on steel exports, since domestic supply was in shortage and the price hike was hurting domestic consumers).

Following the example of the UK government, other countries, including the US, are considering the imposition of windfall gains tax. Back in 2008 too, when oil prices had risen to $140 per barrel, the then president, George W Bush, had wondered whether to impose windfall profits tax. But he didn’t do it. This time the government led by President Joe Biden might do it.
Those critical of taxing windfall gains will cry blue murder and call the government unfair, opportunistic, even cruel. But unusual times call for unusual measures. A logical way to introduce this windfall gains tax is to fix a commodity price level and all revenues earned above it should be taxed at, say, 50% of that incremental revenue (not profit). So, if we say $100 is the upper limit on oil, then anything above that price will be taxed as a fraction of the revenue.
The more transparent this announcement, the less the chance of such a measure getting scuttled by bureaucratic discretion or by vested interest lobbying. And there should be a clear sunset clause, which specifies that this tax will end in this fiscal year.
It is an idea that is worth pursuing for India, and can be applied not just to the oil and gas sector but possibly a few other select commodities too.

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