India has again imposed higher export duties on petroleum products. In view of increased volatility in global crude oil market, the windfall tax on diesel and aviation turbine fuel (ATF) have been increased. The situation has occurred because of geopolitical tensions that continue to affect international oil prices and, prompting authorities to secure domestic fuel and garner more windfall revenues from exporting companies.
This has come as part of a fortnight review mechanism for export duty on petroleum products initiated by the centre. The revised rates are effective from today. Refiners exporting large quantities of both diesel and aviation fuels are expected to be impacted by this.
Revised Export Duty Rates
As per the latest notification, Export Duty on diesel was hiked to 25.50 per litre and the export levy on ATF was increased to 22 per litre. Export duty on petrol was also raised to 3.5 per litre. These duties will be applicable only for exports of petroleum products outside of India and will not be applied to the domestic sales of these products or petrol.
What Led to the Rise in Export Duties?
The decision was prompted by a sharp increase in international crude oil prices due to prevailing geopolitical uncertainty. Persistent tension in Middle East have triggered volatility in global energy markets, the sudden rise in crude prices and thus improved refining margins for exporters were seen increasing potential for extraordinary profits for refiners in India.
In times when the global prices shoot up, refiners in India too generate incredible profits via exporting fuel, these windfall taxes are imposed to claim additional earnings for the exchequer to limit speculative exporting and to ensure better availability of fuel in the domestic market.
Securing Domestic Fuel Security
Government has also laid importance in assuring abundant supply of fuel in the country, the imposition of higher taxes on the export of diesel and ATF will make it less favorable for exports, encouraging refiners to prioritize domestic fuel demand over exports.
Government officials were quick to add that this decision does not impact excise duties on gasoline or diesel for the internal market which would ultimately keep a lid on fuel prices.
Implications for Refiners
The recent hike will mostly be felt by companies that operate largely outside the country’s domestic market, exports of both diesel and ATF from both public and private refiners, who may see a decrease in profit margins as the new taxes diminish returns on overseas ventures, companies that might have significant overseas fuel trade could see a dip in earnings if global prices do not compensate for the higher export duties.
However the actual profit/loss impact of the revision in export duty will depend on factors such as,
international crude oil prices, refining margins internationally, volume of exports and global demand for these fuels. It will be profitable even if margin is tight if the global prices remains high.
Consequences for the Consumers
It is important to note that this decision by the government will not directly increase the price of fuels within India, as previously noted the tax has been imposed on exported fuel and no changes have been made in the excises on fuel for the domestic market.
Indeed analysts opine that with reduced international demand, fuels will be directed for sale to the domestic market, ultimately limiting supply shortage for users in times of high international prices.
Aviation Sector under Observation
Although the increase in tax for aviation fuel is substantial, the domestic aviation sector would probably remain untouched by immediate hike in aviation fuel prices. Nevertheless aviation sector will be closely watching international crude prices as that remain one of the biggest costs for them to remain competitive.
If prolonged tension continues between involved countries which ultimately raise the price of fuel, aviation sector will definitely feel the pinch irrespective of export duty.
Windfall Tax Revisited
India imposed windfall tax on refining companies in 2022 when the international oil prices rose due to geopolitical reasons as that would yield extraordinary income for such companies. The levy was later removed as prices normalized but has been brought back now because of continued rise in crude oil prices. Since then the government reviews the tax every fortnight and revise as needed depending on the crude prices globally.
Market Expectations
According to oil analysts, the export duty rates would be subject to change at least in the near future given the rising global crude oil prices. Market observers and investors will be observing the earnings of oil refiners closely as change in export tax has now become another risk factor for them.
Conclusion
The step taken by the center to increase the export duty for diesel and aviation turbine fuel reflects its commitment to maintaining domestic fuel security while capitalizing on potential windfall gains during global crude oil price volatility. It may have a minor impact on refiners’ export margins, but Indian consumers will not see any immediate price rise for retail fuels.
As geopolitical uncertainties persist globally and impact international energy markets, India’s dynamic windfall tax policy is expected to play a crucial role in safeguarding its energy security.
