The Narendra Modi government has slashed the so-called windfall tax on domestic crude oil producers and refiners and withdrawn the Rs 6 per litre levy on petrol exports, less than three weeks after unveiling plans to gouge the petroleum industry’s fortunes and fatten its parlous coffers.

The rollback of the levies was designed to head off mounting criticism from political rivals that the fuel taxes that came straight out of the blue would ignite retail inflation, currently at 7.01 per cent. In a notification issued on Wednesday, the government said it had decided to reduce the duty on the exports of diesel and aviation turbine fuel (ATF) by Rs 2 a litre to Rs 10 and Rs 4 per litre, respectively.

The Centre also reduced the windfall tax on domestically produced crude by 26.8 per cent to Rs 17,000 a tonne from Rs 23,250, a move that will benefit producers such as ONGC and Vedanta Ltd. The government also exempted fuel exports from refineries located in export-focused zones from the scope of the levy, which will benefit private refiners like Reliance Industries and Rosneft-backed Nayara Energy Ltd, which roughly account for 85 per cent of India’s overall petrol and diesel exports.

The Reliance stock leapt as much as 4.6 per cent to the day’s high of Rs 2,545.05 on the BSE — the biggest leap in the past two months — soon after the news hit the Street. ONGC vaulted over 7 per cent to the day’s high of Rs 136.40. Both counters cooled at the close with RIL showing a gain of 2.47 per cent at Rs 2,501.40, while ONGC was up 4 per cent at Rs 132.55. Super profits India joined a number of nations that recently decided to tax super normal profits of energy companies.

But international oil prices have cooled since then, eroding profit margins of both oil producers and refiners. On Wednesday, Brent crude was down 0.53 per cent at $ 106.8 per barrel. However, in India’s case, the notion of a windfall tax is a bit of a misnomer. Petrol and diesel prices are supposed to be market driven and, in principle, the refiners have the freedom to fix prices.

It is well known that the state-owned refiners were not allowed to raise petrol and diesel prices for four months in the run up to the crucial Assembly elections in several states, including Uttar Pradesh and, therefore, suffered losses. When global crude prices rose, these companies seized the opportunity to recover their losses and, arguably, had not made “windfall gains” that warranted the sudden levy.

Furthermore, there is a glaring difference between how the UK and India have taxed the windfall gains of the oil producers. The tax in the UK is on profits and is therefore a tax on income; in India, this was an indirect tax through the imposition of excise duty and was automatically transmitted to consumers, stoking inflationary pressures in the economy. When the taxes were imposed on July 1, analysts had estimated that the government would earn close to Rs 66,000 crore from the levy on domestic crude oil producers based on last year’s production level of 29 million tonnes.