Taming twin deficit: Tax imposed on fuel exports, levy on crude doubled

Seeking to stem the rupee’s free fall and lay its hands on a chunk of the “windfall profits” reaped by some of the domestic firms on the back of elevated global oil prices, the government on Friday imposed taxes on exports of petrol, diesel and aviation turbine fuel (ATF), and more than doubled the levy on domestic crude and capped exports from non-SEZ units this fiscal. The move is also aimed at addressing the crunch in the domestic fuel market, as private refiners neglected supplies to retail outlets in the country, while tapping the highly remunerative export markets. The revenue impact of the moves could be substantial if the new imposts last longer.

The new special additional excise duty of Rs 23,250/tonne on crude itself could fetch the government over Rs 65,000 crore annually. If the current taxes – oil development cess and royalties – on India crude is roughly 31% or $35/barrel at current prices to refiners, the new impost will roughly translate into another $40/barrel, increasing the effective tax to a hefty 65%. According to analysts, the tax on export of fuels could have “$6-8/bbl blended impact” on Reliance Industries (RIL) if exports from its refineries housed in special economic zones (SEZs) are not exempted.

However, the company, which exports about 58% of its refined products, will get a marginal relief since the caps on exports – 30% for petrol and 50% for diesel – won’t apply to exports from the Jamnagar SEZ unit, where 90% of the throughput is shipped abroad. While margins would reduce in the short-term for standalone export-oriented refining units, state-run oil marketing companies, which also have a robust retail network, might see a marginal improvement in margins, as they could source products at cheaper rates from the former. To be sure, upstream oil producers – state-run ONGC, Oil India and Vedanta’s Cairn & Gas – have benefited from the surge in global oil prices since they follow import-parity pricing.

ONGC, for instance, reported a 31. 5% increase in the net profit for Q4FY22 to Rs 8,860 crore, the highest-ever quarterly number. Similarly, exports of refined products from India surged 161% in FY22 to $67.

5 billion and the key beneficiaries were RIL and Rosneft-backed Nayara Energy. According to analysts, the crack spreads on diesel and petrol for private refiners stood at $60 and $40 per barrel, respectively, in Q1FY23 while the Singapore gross refining margins for the period was $22 per barrel leading to a windfall gain for the companies. Moreover, the companies have managed to secure Russian crude at a discount of $35/ barrel to the international crude price of $118/barrel.

The new export taxes (special additional excise) on petrol, diesel and ATF are Rs 6/litre, Rs 13/litre and Rs 6/litre, respectively. Finance minister Nirmala Sitharaman said the decisions were taken in view of the “extraordinary times” as global oil prices are elevated. The minister added that the government would review every fortnight the new taxes based on international prices.

If oil is not being available locally because certain refiners are drying out their pumps and exports reap phenomenal profits, “we need at least some of it (refiners’ profits) for our own citizens”, she said. The Indian rupee hit a new all-time low of 79 against the dollar on Friday, amid unabated FPI outflows from equities and a broad risk-averse sentiment. The new taxes and curbs on fuel exports would also help mitigate CAD and, in turn, support the rupee.

In recent weeks, fuel shortages were reported in Madhya Pradesh, Rajasthan and Gujarat, as private refiners preferred exporting fuel than selling locally. “The new cess (on crude) will have no adverse impact, whatsoever, on domestic petroleum products/fuel prices. Further, small producers, whose annual production of crude in the preceding financial year is less than 2 million barrels will be exempt from this cess,” the government said in a statement.

Also, it added, to incentivise production, no cess will be imposed on such quantity of crude that is produced in excess of last year’s production. On Wednesday, the Cabinet had lifted the residual regulations on domestic oil producers’ business, by allowing them to sell their produce to anyone in the domestic market at prices not determined solely by any rigid benchmark, but on the basis of freer negotiations with the buyers. The move, the government said, would increase pricing powers of state-run ONGC, Oil India and Cairn and help them in market-determined price discovery, the government had said.

However, with the latest move, the net impact on oil producers would be negative. .