Govt’s move to tax fuel export will impact policy change in energy sector

News: Recently, the government has imposed export taxes on fuels, and a cess on domestic crude production.

Background

Lower domestic prices have incentivised refiners to export products at higher prices, resulting in domestic fuel shortages.

Before announcements, the fiscal deficit was tracking around Rs 2.2 trillion. It was above budget estimates due to higher subsidies and cuts in fuel excise duty.

Objectives

As per the FM statement, the taxes will improve the supply of diesel and petrol in the domestic market. At present, the private refiners concentrate on serving Europe and Asia.

The new fuel taxes could improve the already worsened fiscal condition in this FY

About the new taxation

The government slapped an export duty of Rs 6 a litre each on overseas sales of petrol and aviation turbine fuel.

The government has imposed Rs. 13 a litre on high-speed diesel, translating into 10-23% of current crude prices.

In addition, exporters must declare that 50% of the exported quantity in each shipping bill will be supplied domestically in the fiscal.

There would be a cess of Rs 23,250 a tonne, or $40 a barrel on domestic crude production.

The levies will be open-ended, and further, will be reviewed every fortnight.

What are the issues in these measures?

This is turning into the unease of doing business in India, at least, as far as the energy sector is concerned. For example, for Indian explorers, refiners, and prospective marquee investors led by Saudi Aramco, Adnoc, Exxon, Total and Shell.

There are concerns whether the new tax applies to exports from special export zone (SEZ) facilities run by private refiners, such as Reliance and Nayara.

The imposition of increased export duties on petroleum products is expected to impact export volumes in the short term. At present, Oil products contributed 16% of India’s total merchandise exports of $422 billion in 2021-22.

The government wants the foreign investors to invest in India’s energy sector because India is 85% dependent on foreign oil. India requires foreign technology and capital to tap into our production and exploration potential to stop ever-growing dependence on imports. However, the move will discourage foreign investors.

It will impact India’s aim to increase India’s petroleum exports to $1 trillion by 2030.

Further, India’s overseas oil dependence will increase to 90% in the next few years as it plans to double its refining capacity by 2030.

Such policy flip flops impact the overall image of the country in the medium to long-term.

Way Forward

The measure should remain temporary, say for three to six months because it can scare new players and investors, if the new taxes remain there for a longer duration.

India needs consistent, business-friendly policies and investor-friendly policies

The impact on investments would be limited because at present, the gross refining margins (GRM) are high which are unlikely to sustain for long. Further, most investment decisions assume more normalised GRM through the cycle.

Most private refineries are implementing capex towards crude-to-chemicals rather than crude-to-petroleum products.

Source: The post is based on an article “Govt’ move to tax fuel export will impact policy change in energy sector” published in the Business Standard on 4^th July 2022.