What is Windfall Tax?

Windfall tax is the tax levied by the government when a particular company makes extraordinary returns/profits in its business. These extraordinary returns are based on factors like governmental regulations, economic conditions, etc. that allowed the company to achieve 1000 times as much profit in a given year. 

Some personal taxes, such as inheritance taxes and taxes on gains from gameshows or lotteries, can also be considered windfall taxes.

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Why Does the Government Impose a Windfall Tax? 

A windfall tax is a ‘surtax’ that governments apply on companies or industries that have profited from economic growth. Although this is a debatable notion, the objective of a windfall tax is to redistribute surplus revenues in one region in order to raise funds for the benefit of society as a whole. 

Here are 3 ways companies resists paying Windfall Tax

Buying Shell Companies 

Buying shell companies is one of the oldest ways of reducing the taxable amount of the company. 

A shell corporation is the one that does not have any major assets or run businesses. Although not all these corporations are unlawful, they are occasionally used improperly, such as to hide corporate ownership from the public or law authorities.

In this scenario, the company acquires other institutions, which are comparatively smaller and the new company does the profits and losses of the new company become part of the original company. In circumstances when the original company suffers losses, the parent company registers these losses as corporate costs, lowering the tax burden.

Selling all the Assets that are in a Loss 

Another method of lowering taxes in the financial year when assets and losses were present is to sell assets that are legal. There is a provision under the income tax act that allows businesses to declare losses in assets for that specific financial year in order to lower their oral tax liability.

You either realize financial gains or financial losses when you invest in assets. These are categorized as long-term and short-term depending on how long you plan to have these assets in your possession. Currently, long-term capital gains (LTCG) beyond Rs. 1 lakh are taxed at 10% without indexation, whereas short-term capital gains (STCG) are taxed at 15%. 

Investors can offset capital losses against capital gains to lower their tax obligations, according to the Income Tax Department. For example, you only need to pay tax on the net gain of Rs. 4000 if you have made short-term capital gains of Rs. 5000 and short-term capital losses of Rs. 1000 in a given financial year.

Providing Benefits to Company Workers 

Yet another way of reducing tax labs is by providing insurance schemes to employees. As per the income tax act, there is a tax exemption for group insurance policies as well.

Final Thoughts

In conclusion, windfall taxes are an inevitable part of paying taxes to the government. This is because the government claims additional income for your extraordinary profits. These profits could be the result of economic factors that are influencing the market.

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