Reliance SEZ Export Duty Clarity Key under India's Fuel Tax Rejig: Analysts

The applicability of newly reimposed export windfall taxes on shipments of diesel and ATF from Reliance Industries' SEZ refinery remains the key uncertainty, following India's fuel duty overhaul, with significant implications for refining margins and government revenues, according to analysts.

Under the revised framework, effective March 26, India has imposed export duties of Rs 21.50 per litre on diesel and Rs 29.50 per litre on aviation turbine fuel (ATF) while keeping petrol exports exempt. This came alongside a Rs 10 per litre cut in excise duty on petrol and diesel.

However, it is not yet clear whether exports from Reliance's special economic zone (SEZ) refinery, which accounted for a large share of India's refined product exports, will continue to enjoy exemptions, as they did under the 2022 windfall tax regime, UK's Investec said in a note.

Reliance owns and operates two refineries at Jamnagar in Gujarat - a 33 million tonnes per year unit catering to the domestic market and a 35.2 million tonnes only-for-exports SEZ unit.

If SEZ exports remain exempt, Reliance's refining margins would be largely insulated from the new levies, preserving the competitiveness of its export-oriented operations, it said. Conversely, inclusion under the export duty net would materially compress margins on diesel and ATF shipments.

Citi Research, in a separate note, said the duty changes provide meaningful relief to oil marketing companies while capping refining upside for Reliance.

"OMCs benefit via reduction in marketing losses on petrol and diesel by Rs 10 per litre, the diesel export tax being offered as a discount on RTP (refinery transfer price), i.e., price at which OMCs buy diesel from standalone refiners to the extent of their shortfall (HPCL benefits more)," it said.

"We estimate this lowers integrated marketing losses on petrol/diesel for the OMCs from Rs 35-40 per litre to Rs 19-23 a litre." Consequently, OMCs' breakeven crude (the level at which normalised marketing margins would be achieved) rises from USD 65 per barrel to USD 80.

"Besides global crude and product price moves, key to monitor going ahead will be any changes in retail fuel prices after the five upcoming state elections in April," Citi said.

Citi said the export taxes are equivalent to USD 36 per barrel on diesel and USD 50 per barrel on jet fuel.

"In FY25, 75 per cent of Reliance's diesel production and 35 per cent of its jet fuel production were from its SEZ refinery, which we believe, based on 2022 precedent, could be exempt from this tax.

"If we therefore assume the export tax is applicable only on the non-SEZ volumes, the impact should be largely offset by still-elevated diesel/jet fuel cracks vs pre-conflict levels," it said.

Investec said despite steep export duties, refiners continue to earn healthy export margins of USD 15-25 per barrel, supported by strong diesel and ATF cracks (USD 65-70 a barrel), while weaker petrol cracks (USD 8-9) explain its exemption from the levy.

"While the move delivers immediate earnings relief to OMCs, the sizeable fiscal cost amid a tight macro backdrop suggests further policy fine-tuning is likely, making regulatory recalibration a key near-term monitorable," it said.

The government on Friday announced the first material reduction in domestic petroleum excise since April 2022, providing much-needed margin relief to OMCs. The Special Additional Excise Duty (SAED) on petrol has been cut by Rs 10 per litre to Rs 3, while the SAED on diesel has been fully withdrawn (from Rs 10 per litre to zero).

These measures directly ease margin pressures for OMCs, which were incurring gross losses of about Rs 10 per litre on petrol and Rs 35 a litre on diesel, it noted.

On fuel export tax, it said, "A key uncertainty persists around whether Reliance's SEZ exports will continue to qualify for exemption, as they did under the 2022 regime; the resolution of this will be critical in determining the effective impact on Reliance's refining margins".

The government has not reintroduced a crude oil windfall tax on upstream producers - a key positive surprise. With crude prices elevated, markets had expected a renewed levy, so this outcome removes a major overhang and supports a near-term trigger for ONGC and Oil India.

"That said, given the revenue pressures on both the government and OMCs, a reintroduction of some form of upstream levy cannot be ruled out. While legal uncertainties persist around reinstating the earlier framework, a modified version could resurface as a fiscal balancing measure," it said.

The decision is also critical for the fiscal math. Investec estimate the net revenue impact of the broader excise duty changes at about Rs 80,000 crore annually without exemptions, widening to roughly Rs 1.5 lakh crore if SEZ-linked exemptions are retained.

Despite the steep export duties, equivalent to roughly USD 40-55 per barrel, strong product cracks of USD 65-70 per barrel for diesel and ATF continue to support export margins of USD 15-25 per barrel, suggesting exports remain viable even if levies apply.

Clarity on SEZ treatment is awaited and is seen as a key near-term trigger for both Reliance's earnings outlook and the government's revenue trajectory.