5 reasons why windfall profits tax is wrong

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