Excise cut to cost exchequer ₹1.65 lakh crore; OMCs gain, refiners hit: Nomura

The recent ₹10 per litre cut in excise duty on petrol and diesel, along with the reimposition of windfall tax on diesel and aviation turbine fuel (ATF) exports, is expected to support state-run oil marketing companies (OMCs), while weighing on standalone refiners, according to a Nomura report.

The brokerage said the excise duty reduction will partly offset losses being incurred by OMCs as crude prices remain elevated while retail fuel prices have been kept unchanged. Although marketing margins are likely to stay negative, the overall impact on an integrated basis is expected to be positive for the three state-run fuel retailers.

OMCs seen gaining

Nomura estimated that Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd could see integrated margin gains of about $12 per barrel, $15 per barrel and $20 per barrel, respectively, from the excise duty cut, with HPCL benefiting the most due to higher exposure to fuel retailing.

The report said OMCs may also gain from the reimposed export tax if domestic refiners divert export volumes to the local market and sell at prices adjusted for the levy. HPCL, in particular, could benefit as a significant portion of its diesel sales is sourced from third-party refiners.

Reliance impact limited, others under pressure

The government has imposed special additional excise duty on exports of diesel and ATF to discourage overseas sales and improve domestic availability amid global supply disruptions. Nomura said the levy is not expected to apply to Reliance Industries Ltd’s export-oriented SEZ refinery, though its domestic refinery will be subject to the tax, resulting in an estimated impact of about $8.7 per barrel on its overall gross refining margin.

Earlier today, government confirmed that the reimposed windfall export taxes on diesel and aviation turbine fuel (ATF) will not apply to Reliance Industries Ltd's SEZ refinery due to judicial rulings.

"As per judicial pronouncements on this issue, the special additional excise duty and additional excise duty are not applicable on SEZ refineries," Jainendra Singh Kandhari, Joint Secretary in the Tax Research Unit (TRU-1) of the Department of Revenue, said at a media briefing.

According to Nomura, the export levy will apply to other domestic refiners, including Mangalore Refinery and Petrochemicals Ltd, Chennai Petroleum Corporation Ltd, HPCL-Mittal Energy Ltd and Nayara Energy, which are more exposed to export markets and have limited retail presence.

NRL among most impacted

The report flagged a sharp impact on Numaligarh Refinery Ltd, which may be hit by both the excise duty cut and the export levy. It estimated a combined impact of about $32.5 per barrel on the refinery’s gross refining margin.

Fiscal cost seen at ₹1.65 lakh crore

Nomura estimated the excise duty reduction could have a fiscal impact of about ₹1.65 lakh crore, or roughly 0.45% of GDP. It does not expect meaningful revenue gains from the windfall tax, as export volumes may be redirected to the domestic market.