Government increased export taxes on petrol, diesel, and ATF

The government has decided to impose an export tax on petrol, diesel, and jet fuel (ATF) transported abroad by companies like Reliance Industries in order to relieve the shortage of local fuel supplies. Additionally, it has slapped a windfall tax on domestically produced crude oil generated by businesses like ONGC and Vedanta.

Another government announcement revealed that an extra tax of Rs 23,230 per tonne had been imposed on locally produced crude oil to offset producers’ windfall profits from high international oil prices. “The cost of crude has significantly increased recently. Domestic oil producers offer their product to domestic refineries at prices that are competitive internationally. Thus, domestic crude producers are benefiting unexpectedly. Acess of Rs 23,250 per tonne has been placed on oil in consideration of this. According to the administration, imports of oil would not be subject to this cess.

Reasons for increasing Export Tax on fuel by Central Gov

Nirmala Sitharaman, the union finance minister, explained the tariffs, saying although they were pleased with the profits fuel exporting firms were generating, the tax measures were necessary because of the “exceptional circumstances” we are living in. “International oil prices are currently out of control. They simply keep moving higher.

Additionally, we must spend that much money to import goods into any country, such as India, which depends heavily and significantly on imports. However, exports from India are taking place and at an unusual price, (producing) tremendous profits. We have nothing against individuals making money. However, at a time when we don’t have enough supplies in India for the exploration or refinement that is taking place there,” she said in a press conference. The Finance Ministry did not provide a date for the levy’s continuation, but it did state that it will reassess the situation every 15 days to determine how these duty modifications have affected things.

Recently, the UK imposed a 25% tax on “exceptional” revenues from the production of oil and gas in the North Sea in order to collect $6.3 billion for its assistance programme. In order to reduce inflationary pressure, the Indian government reduced the excise charge on gasoline and diesel.The cost of this action to the government was Rs. 1 lakh crore.

Following Russia’s invasion of Ukraine, oil refiners, in particular Reliance Industries and Rosneft-backed Nayara Energy, made a mint by shipping petroleum to impoverished areas like Europe and the US. They are said to have processed discounted Russian crude oil after the West spurned it and sold the fuel made from it to Europe and the US.

Market reaction on increase in Excise duty on Petrol & Diesel

Although this action might lessen the fuel scarcity at petrol stations across the nation, it would have an adverse effect on these business’ finances. After the statement, Reliance Industries Ltd.’s share price dropped by more than 7% on the BSE, ending the 1 July at Rs. 2408.95. Due to the increase in global petroleum prices, domestic crude producers are benefiting greatly. Following the release, ONGC Ltd.’s share price dropped 13.40% on the BSE. While Mangalore Refinery and Petrochemical fell 10%, Oil India fell more than 15%. The shares of Hindustan Oil Exploration Company sank more than 3%, while Chennai Petroleum Corporation plunged more than 5% on 1 July.

Retail Price in India compared to Global Prices

India is increasingly reliant on imports to meet its needs for petroleum products. For instance, net petroleum product imports were 69 % of total consumption in 1998–1999 but grew to over 95 % in 2020–21. Any change in the price of crude oil globally has a substantial influence on the domestic cost of petroleum products since imports make up a large portion of domestic consumption. The two figures below indicate the trajectory of India’s retail pricing for gasoline and diesel during the past nine years, as well as the price of global crude oil.

Implications on Stock Market

Individual firms are most obviously impacted, even though stock markets may not be as a collective. There are several causes:

Cost of Inputs Rising: Oil is a crucial input for many businesses. Naturally, input costs and overall production costs increase along with rising crude oil prices. As a result, the profit margins decline, which in turn lowers the company’s stock price. Businesses like airlines, refineries, logistics, paints, and others are most negatively impacted.

Current Account Deficit: A significant share of India’s overall imports are made up of oil. Foreign currency begins to leave the country once the current account imbalance widens. The rupee weakens as a result of this. As a result, imports are now more expensive since the government will have to spend more money to obtain the same amount as before. Import costs rise, input costs rise, and stock prices decline once more.

Increase in Transportation Costs: As the price of crude oil rises, transportation costs will also go up, raising the company’s expenses. Once more, this suggests that profit margins will be less and stock prices will drop. In contrast, a decline in oil prices will result in a rise in stock prices.

Rise in Inflation: Investors lose faith in companies when inflation rises, which has a negative impact on stock values. On the other hand, a decline in oil prices increases investor confidence and benefits stock prices.

Further planning on Taxes on Fuel

For the fiscal year ending March 31, 2023, the government drafted new regulations mandating oil businesses exporting gasoline to sell in the domestic market the equivalent of 50% of the volume supplied to clients abroad. This criterion has been set at 30% of the amount shipped for diesel.

These export limitations also serve to replenish domestic gasoline supplies at gas stations, some of which had run out in states like Gujarat, Madhya Pradesh, and Rajasthan as private refiners preferred to sell fuel abroad rather than domestically.

Exports were favoured since retail prices for petrol and diesel at major PSU merchants were limited at levels well below their actual costs. As a result, private merchants, who hold less than 10% of the market, are forced to sell fuel at a loss or risk losing market share if they offer it at a higher price. Domestic producers that sell oil to local refineries at international parity rates have profited from the recent strong surge in crude prices.

Additionally, a cess of Rs 6 per litre has been levied on aviation turbine fuel (ATF). However, according to the government, there won’t be any price increases in the domestic market as a result of these actions.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

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