What is windfall tax?

Windfall tax is what’s imposed on windfall gains, an abnormal increase in the profits of any organization in the normal course of its business due to certain circumstances. An example would be the increase in the price of oil over the world. In this case, the oil exploration and production (E&P) companies will make huge gains if they sell oil to local refining companies at international prices, which are high. This gain is due to circumstances favouring E&P companies and not due to their cost-cutting or other efficient operations. These are windfall gains and the tax on such gains is called windfall tax.