WINDFALL TAX

The controversial proposal to introduce windfall tax has left private oil companies in the country a worried lot. Heres all you need to know about that issue - how viable is it and whether companies are actually making windfall profits.
Windfall tax is a tax imposed on profits made by virtue of market conditions rather than companies' own efficiency, operational style or technology.
But the key question is - whether companies are actually making windfall profits?
Analysts say that if private oil companies were well integrated, then there were chances of them profiting. But refineries in India are using crude which is imported at market price.
But upstream companies which explore and produce oil do reap gains. But the quantum of oil produced by private companies is around 10 million tonnes which is insignificant, keeping in mind total consumption.
Besides, oil producing companies, as part of the production sharing contract, do pay the government a royalty which is ad valorem. So then is the government justified in contemplating windfall taxes?
It's argued that the government does not cushion the private oil companies when they make losses, then on what ground really, is it demanding a pie of the profit, if at all!
Also the high risk in the business of oil exploration and production means that without incentives like tax concessions, private players or global investment will keep a safe distance.
Analysts say it is unjustified to compare India with China, Malaysia or Venezuela, who've imposed windfall taxes in the recent past.
The question is whether the government will indulge in bad economics for the sake of political survival as it seeks a windfall in the vote of confidence next week.