The just-introduced tax on windfall energy profits of oil refiners like Reliance Industries is not only levied on the diesel they export but also on the supplies they make to fuel retailers within India, sources said.

The government, on July 1, levied ₹13 per litre additional excise duty on diesel exported out of India. A ₹6 a litre tax was also imposed on petrol and ATF exported out of India. Alongside, it imposed export restrictions, subject to meeting domestic sales of 50 per cent for petrol and 30 per cent for diesel exports.

In subsequent fortnightly reviews, the government scrapped the export tax on petrol and jet fuel (ATF) and more than halved the export tax on diesel to ₹5 per litre.

The windfall tax was targeted mainly at Reliance Industries Ltd and Russian oil major Rosneft-backed Nayara Energy, who the government believed were making a killing on exporting large volumes of fuel made from discounted Russian oil at the cost of the domestic market, three sources with knowledge of the matter said.

But the state-owned fuel retailers like Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL), who have a sizeable dependence on supplies from standalone refineries to feed their vast retail network, started paying for petrol and diesel bought from Reliance and others after deducting the newly imposed additional excise duty.

The 2.5 per cent customs duty on petrol and diesel is also considered for calculating the trade parity price.

“Post July 1, the OMCs started reducing export taxes from this calculation, resulting in lower realisation,” they said.

"OMCs must be doing it on their own, and rightly so. The pricing is always based on an alternate market or source. If the alternate market for these refiners is export, where they have to pay the tax to the government, a similar deduction on supplies made elsewhere is justified."

Fuel retail by state-owned firms

The Indian fuel retail scene is dominated by state-owned firms Indian Oil Corporation (IOC), BPCL and HPCL. While IOC is largely self-sufficient in producing petrol and diesel in its own refineries and its subsidiary CPCL, BPCL and HPCL do not have oil refining capacity commensurate with their retail operations. And so, BPCL and HPCL depend on supplies from standalone refineries - the units that process crude oil into fuel but either have no retailing business or a very limited presence.

Reliance has 1,470 petrol pumps out of 83,685 petrol pumps in the country. Nayara Energy has 6,635 pumps.

These outlets of the private sector heavily restricted sales beginning March/April as they couldn't afford to sell petrol and diesel at a loss since public sector competition froze rates to help the government contain inflation.

This diverted traffic to public sector petrol pumps which were also flooded with bulk users like state road transport corporation buses. Bulk users flocked to petrol pumps as rates there were subsidised in comparison to the market price they otherwise would have to pay.

Simultaneously, the private refineries started ramping up exports to capture the supply deficit created by the war in Ukraine.

The deadly combination resulted in petrol pumps in several locations going dry, prompting the government to clamp down. This clampdown has helped resort supplies but standalone refineries lost heavily. Sources said initially the export duty was applicable on all exports, including from Reliance's SEZ but in subsequent revisions, the tax on only-for-exports refineries was dropped.