The state-level political dynamics behind the windfall tax on fuel exports

Gujarat has the highest percentage of private oil pumps at 24%, followed by Rajasthan at 14.5%; the former will elect a new legislative assembly by this December, the latter, a year later

It is an interesting exercise to view the finance ministry’s recent decision to charge a “windfall tax” on oil companies in the context of state-level political dynamics. 

On July 1 this year, the ministry imposed a cess of Rs 6 per litre on petrol and Rs 13 per litre on diesel exported from India. A notification issued by the ministry stated, “As exports are becoming highly remunerative, it has been seen that certain refiners are drying out their pumps in the domestic market.” Unusually the ministry used the term “windfall gains” to explain why these taxes among a set of other measures were introduced. 

An additional condition was also imposed through the office of the Directorate General of Foreign Trade. It was that the exporters would have to certify in each of their export invoices that 50 per cent of the quantity mentioned in the shipping bill is being supplied in the domestic market during the current financial year. 

Since government-owned oil marketing companies like IOC, BPCL and HPCL hardly offload any petroleum products abroad, it was obvious that these two measures were principally meant to cut back on exports from the refineries owned by RIL and Nayara Energy. These companies also own a large number of retail vends in India from where they serve the domestic market. RIL did not respond to a query from Business Standard on the issue.

There were also some other tax measures, which were however, targeted at the profits of state-run upstream oil companies like ONGC and Oil India. These included a cess of Rs 23,250 per tonne on domestic crude production (by way of special additional excise duty). The finance ministry argued that crude prices have risen “sharply in recent months. The domestic crude producers sell crude to domestic refineries at international parity prices”. So the exchequer was clawing back some of those profits. 

The cess on exports, as the ministry itself stated, was meant to raise the availability of diesel and petrol at the retail level within India. As the pumps run by the state-owned companies did not have to face any competition from  the export market, it stands to reason that the government order was meant to raise availability of diesel and petrol at the pumps owned by the private sector companies.  

In June, petroleum minister Hardeep Puri had acknowledged publicly there were concerns about private refiners not selling in the domestic market. “It is a legitimate question to ask,” he had said.

Of the 15 major states in India where the private sector vends are present, the largest percentage is in Gujarat, at close to 24 per cent. That means one in every four retail oil vends in the state is privately owned. A fairly distant second position is held by Rajasthan at 14.5 per cent.

Significantly, while Gujarat will elect a new legislative assembly before December this year, Rajasthan shall go to the polls exactly a year later. 

As per the table, the only other state where the percentage of private sector retail pumps is into double digits as of now, is Tamil Nadu. In Karnataka, the number of private vends is over nine per cent while in Maharashtra it is less than seven per cent. The petroleum and natural gas ministry had recently received a report from Crisil Research on the scope of expansion of retail oil pumps in the economy. 

Incidentally, after the imposition of the windfall tax, while it is understood that the oil companies have remonstrated saying the rates were steep, top level sources in the government have said these companies were sounded out about the tax. “But they did not believe that we would actually go ahead.” 

Table: State wise retail outlets

State/UT	PSU	Pvt sector	Total	Pvt sector (% of total)
Haryana	3,368	141	3,509	4.01
Himachal Pradesh	572	19	591	3.2
Punjab	3,677	156	3,833	4.1
Rajasthan	4,942	838	5,780	14.5
Uttar Pradesh	9,356	357	9,713	3.7
Jharkhand	1,530	41	1,571	2.6
Odisha	2,075	84	2,159	3.9
Gujarat	4,058	1,224	5,282	23.2
Madhya Pradesh	5,006	199	5,205	3.8
Maharashtra	6,756	500	7,256	6.9
Andhra Pradesh	3,722	392	4,114	9.5
Karnataka	5,163	516	5,679	9.1
Kerala

2,331  112     2,443  4.6 Tamil Nadu        5,871          688              6,559  10.5 Telangana         3,434     217              3,651  5.9

Source: PPAC and Parliament Questions; As on March 2022

Table: Company-wise distribution of petrol pumps

Company	No. of outlets
Indian Oil	34,818
BPCL	20,217
HPCL	20,183
MRPL	36
PSU total	75,254
Jio-bp	1,470
Nayara Energy	6,635
Shell	326
Private sector total	8,431