Windfall Tax

Windfall Tax Meaning

A windfall tax is a charge levied by federal governing bodies on business entities when they make abnormal gains from financial windfalls. The idea behind such taxes is to reallocate favorably abnormal profits in one sector for social causes. Taxes like lottery tax or tax on winnings from game shows and horse racing, gambling or betting are examples of windfall taxes.

How does Windfall Tax Work?

Windfall Tax

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Benefits

  • The most certain benefit of windfall taxes is that it boosts government revenues. It enables them to substantially provide public services and other benefits to the citizens of the country like building civil infrastructure, health facilities, sanitation, and also building the nation’s military strength.
  • The additional funds raised through this tax can service the debts by the countries to various global financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more and may bolster the national economy. However, it may also act as a disincentive to companies.
  • If companies become aware that windfall gains will be taxed, they may not seek out such profits with innovative business plans. A part of these receipts has to be parked in a personal contingency fund in bank fixed deposits.
  • The beneficiary of windfall gains can repay interest-bearing consumer or car loans, in which case the asset depreciates to lower than the loan outstanding. The other part of windfall gains can be used to repay housing loans to bring down interest costs and EMI’s.
  • The other viable option can be to invest the windfall proceeds in gold deposits. One part of the corpus can be given to a charitable organization of repute who is catering to the cause of education or health or child welfare. The donations made to charitable causes can be used to claim deductions from 50% to 100% from the income liable to tax.

Drawbacks

Conclusion

Windfall taxes provide a good source of revenue to the government as it follows the principle that those who have earned a surplus through windfalls to be taxed and also discouraging businesses of the lottery, gambling, horse racing, etc. It affects the companies which earn huge profits in the business of oil and gas as they have lesser income in the form of dividends to be distributed to its investors.

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