Govt overhauls excise duty, windfall tax as West Asia crisis hits energy markets

In response to the escalating West Asia conflict and the subsequent volatility in global energy markets, the Government of India has implemented a strategic overhaul of excise duties and windfall taxes to stabilise the domestic economy. To shield citizens from surging global crude prices and protect OMCs (Oil Marketing Companies), the special additional excise duty on petrol has been cut by ₹10 per litre, effectively slashing duty on Petrol from Rs. 13 to Rs. 3 and on Diesel from Rs. 10 to zero.

Although these significant tax reductions will not result in lower costs at the pump, they are designed to offset the massive under-recovery losses currently being absorbed by state-run oil marketing companies like IOCL, BPCL, and HPCL, thereby ensuring that retail petrol and diesel prices remain unchanged for the general public.

"The combined daily under-recovery being absorbed by OMCs is approximately Rs 2,400 crore. The excise reduction offsets Rs 10 per litre of these losses, ensuring OMCs can continue to supply fuel without disruption while keeping retail prices unchanged," the Ministry of Petroleum & Natural Gas mentioned in a statement on Friday.

Highlighting the rationale behind the move, Minister for Petroleum and Natural Gas, Shri Hardeep Singh Puri, stated, “The government had two choices: either increase prices drastically for citizens of Bharat as all other nations have done or bear the brunt on its finances so that the Indian citizen is insulated from international volatility. Honourable Prime Minister Shri Narendra Modi Ji decided to take a hit on government finances to safeguard the Indian citizen. The government has taken a substantial impact on its taxation revenues to reduce the high losses being faced by oil marketing companies at this time of sky-high international prices.”

As far as the overall estimated impact of the tax cuts of the government is concerned, analysts suggest that the government's decision to cut special excise duty on petrol and diesel by Rs 10/litre each and absorbing ~30-40% of annualised losses of OMCs could mean an annualised fiscal hit of approximately Rs 1.55 trillion.

Simultaneously, the government is tightening its grip on fuel outflows to prioritise domestic energy security. A steep export tax of ₹21.5 per litre has been imposed on diesel, making international sales less lucrative for refiners during this period of global shortage.

However, in a move to maintain regional stability and support diplomatic ties, exports handled by Public Sector Undertakings (PSUs) to four key neighbouring countries, including Nepal, Bhutan, Bangladesh, and Sri Lanka, remain exempt from these new levies. This ensures that India’s immediate neighbours are not disproportionately affected by the domestic policy shift.

The aviation sector has also seen a recalibration of fiscal measures, particularly concerning Aviation Turbine Fuel (ATF). The government has capped the windfall tax on ATF via an exemption at ₹29.5 per litre, a move primarily aimed at regulating export-linked supplies. Notably, the tax on domestic aviation fuel remains unchanged, preventing an immediate hike in domestic airfares.

Shares of IOCL, BPCL, and HPCL jumped higher on Friday morning after the government announced an overhaul to the excise and windfall tax amid the ongoing West Asia crisis.