Govt scraps windfall tax on domestic crude, hikes export duty on diesel

The government on Tuesday slashed the windfall tax on domestically produced crude oil to nil from ₹3,500 per litre imposed earlier with effect from April 1, according to a government notification. However, the government has hiked the export duty on diesel to ₹0.50 per litre from ₹1 per litre. The government has already removed levied tax on the export of petrol and aviation turbine fuel. This is the 18^th consecutive imposition of windfall tax since July 2022.

On July 1, 2022, the government imposed the windfall tax on exports of crude oil, diesel and aviation fuel for the first time, after private refiners preferred overseas markets to gain from high refining margins, instead of selling at lower-than-market rates in the country. The tax rates are revised every fortnight based on prevailing international rates. Indian Oil Corporation Limited (IOCL), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) together control around 90% of the fuel retailing network in the country.

On Tuesday,  the oil prices surged following OPEC+ (Organisation of Petroleum Exploring Countries and allies including Russia)  announcement to lower oil output to 1.16 million barrels per day. Brent crude futures surged 42 cents or 0.5% to $85.35 per barrel by 0632 GMT. US West Texas Intermediate (WTI) crude futures were up 43 cents or 0.5% at $80.85 per barrel.

The government had earlier said the prices of petrol and diesel have not been increased by public sector oil marketing companies (OMCs) since April 6, 2022, despite record-high international prices. As a result, the three state-run fuel retailers — Indian Oil Corporation, BPCL and HPCL — booked a combined loss of ₹27,276 crore in the first six months of the ongoing financial year, against the combined profit before tax of ₹28,360 crore in the first half of the financial year 2021-22. IOCL, BPCL and HPCL together control around 90% of the fuel retailing network in India.

Rating agency Moody's in January this year said that the country’s windfall tax on exports of locally-produced oil has helped reduce the state-owned refining and marketing companies' marketing losses.

"The three companies have been able to secure a discount of an amount equal to the export duties on their purchases from private-sector refiners, which lowered the cost of buying the fuels. HPCL has benefited the most from these discounts because it has the highest proportion of external purchases among the three companies," the rating agency said.

The state-owned refining and marketing companies will also benefit from their continued purchases of Russian crude oil, according to Moody's. Significant marketing losses earlier in the year will drag on earnings for the three state-owned refining and marketing companies in the financial year ending March 31, 2023, the rating agency says.

Moody's expects marketing margins to normalise only when the refining and marketing companies' net realised prices for petrol and diesel are allowed to freely align with international prices. "This will likely happen only in 2024 after the conclusion of general elections in India," says the rating firm.