What is the tax component in petrol and diesel in India?

“Crude Oil Cola” by AZRainman is licensed under CC BY 2.0

Retail prices for gasoline and diesel have continuously risen to all-time highs in recent months. The retail price of petrol in Delhi on October 16, 2021, was Rs 105.5 per liter, and diesel was Rs 94.2 per liter. These costs were considerably higher in Mumbai, at Rs 111.7 per liter and Rs 102.5 per liter, respectively. The discrepancy in retail fuel costs between the two cities is attributable to the varying tax rates imposed by the separate state governments on the same products. This article examines the tax components in the price structure of gasoline and diesel, their variation across states, and the significant changes in taxing of these goods in recent years. The retail prices of petrol and diesel in India are revised on a daily basis by public sector Oil Marketing Companies (OMCs) in response to variations in the price of global crude oil. The price charged to dealers comprises the OMCs’ base pricing as well as the freight price. 

As of October 16, 2021, the amount charged to dealers is 42 percent of the retail price for gasoline and 49 percent of the retail price for diesel. The breakdown of retail prices of petrol and diesel in Delhi (as of October 16, 2021) reveals that central and state taxes account for around 54 percent of the retail price of petrol. This is close to 49 percent in the case of diesel. India’s reliance on imports for petroleum product consumption has grown over time. For example, in 1998-99, net imports of petroleum products accounted for 69 percent of overall consumption, rising to about 95 percent in 2020-21. Because imports account for a considerable portion of local consumption, every change in the worldwide price of crude oil has a significant impact on domestic petroleum product pricing. While excise duty rates are consistent across the country, governments levy a sales tax/Value Added Tax (VAT) that varies by state. For example, Odisha imposes a 32% VAT on petrol, while Uttar Pradesh imposes a 26.8 percent VAT or Rs 18.74 per liter, whichever is higher.

Despite the fact that the center levies central taxes (such as excise duty), it only receives 59% of the revenue from these taxes. According to the 15th Finance Commission’s proposals, the remaining 41% of revenue must be devolved to state governments. These devolved taxes are untied in nature, allowing states to spend them how they see fit. Small tax increases on gasoline and diesel have been shown in studies to significantly improve the environment due to reduced consumption; however, as with other public interventions, energy price increases can undermine equity objectives, posing an equity-efficiency trade-off familiar to economists. Though the equity or distributional impact varies between and within countries depending on social, geographic, climatic, and economic conditions, as well as the pattern of energy use in households, there is agreement that poor households suffer more from energy price increases because they spend a larger share of their income on energy and energy services.