This tax reduces gross refining margins (GRMs) for third-party refiners which export, and it offers an incentive for exporters to sell to oil marketing companies (OMCs) instead for domestic consumption. Since excise rates have been cut, the new windfall taxes may offset some revenue forgone from excise duty reductions.
Most diesel exports are from SEZ refineries exempted from windfall export taxes. Hence revenues will be realised mainly on ATF exports. OMCs may seek lower prices from non-SEZ independent refiners. The tax may not be applicable to about half of Reliance’s refining capacity, which is SEZ-designated.
Standalone refiners may get into agreements with OMCs to supply diesel at export realised prices (after windfall tax), which would be lower cost for OMCs. HPCL for example, sources 32 per cent of the diesel it sells from standalone refineries so this could be a substantial saving. Right now, integrated margins for IOCL, BPCL, and HPCL are negative. ATF is a small proportion of overall volume for OMCs and 35 per cent of ATF is sold to international airlines at prices linked to Dubai and Singapore. IOCL has 59 per cent market share in ATF sales. OMCs will be losing over ₹22 per litre on ATF sold to domestic airlines after windfall tax.
The taxes are designed to partly offset higher crude oil prices and encourage domestic availability. The revised rates may leave small or negative spreads on diesel. The government says crude oil sourcing is secured for next two months and surplus refining capacity also provides a buffer for diesel, petrol and ATF. Given high export taxes, non-SEZ independent refiners may seek to sell products domestically at discount to OMCs.
As of now, risks of re-imposition of windfall tax on upstream production seems low. Crude oil prices are guaranteed to stay high due to the blockade and damage to infrastructure. At spot prices, the OMCs are subsidising retail consumers by about ₹18 per litre on petrol and ₹35 per litre on diesel. If crude oil rises by $10 per barrel, OMCs would incur incremental ₹6 per litre losses assuming retail prices are not hiked. After Assembly elections, price hikes are very likely.
India imported 88 per cent of its crude in 2025, with 45 per cent sourced from West Asia, 35 per cent from Russia, and 6 per cent from the US. On the product side, India is a net diesel exporter (exporting 24 per cent of production), petrol (35 per cent of production), and ATF (44 per cent of production).
Excise on petro products generates 8 per cent of revenue. The government cut excise duties by ₹10 per litre in March, 2026. The central excise on petrol and diesel is now ₹11.9 per litre and ₹7.8 per litre, respectively. The current account deficit or CAD which was $13 billion or roughly 1.3 per cent of GDP (annualised) in October-December 2025 may be over $20 billion in January-March 2026. CII estimates a rise of $10 per barrel in crude prices could impact CAD by 30 basis points of GDP, if other variables are stable. Analysts assume a rule-of-thumb impact of 5 per cent of operating profit on OMCs for every $1 per barrel change in crude oil costs. At crude oil above the $80-85 band, operating profit moves into the negative zone without price hikes.
OMCs IOCL, BPCL, and HPCL buy 18 million tonnes per annum diesel in aggregate from refiners like Reliance and MRPL. The ‘Refinery Transfer Price’ or RTP for sales is linked 20 per cent to export parity prices and 80 per cent to import parity. The $95 per barrel export tax on diesel will reduce RTP by about $19 per barrel. Bloomberg says diesel is currently priced at $180 per barrel and cracks are $60 per barrel at current crude prices. The tax will pull GRM down by $6-7.
Given geopolitics, retail price hikes seem inevitable if OMCs are to stay in the black. Reduced excise duties cannot compensate for the big spikes in crude oil prices and the likelihood that higher crude prices will be sustained.
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