Fuel Taxes in India: Everything you need to know

Petrol prices in India have always been a topic of heated arguments in the politics of the country. While the onset of the COVID-19 pandemic has wrecked the economic system of the world, its major impact can be seen on oil prices in India - the third-largest exporter of oil in the world.

The pricing of fuel in India differs by state. The central government is majorly responsible for the price increase, but state governments also play an important role. When you check the prices of petrol and diesel, you will notice that nearly half of the price is given as the taxes for the central and state governments. The different taxes of the central government are responsible for about 25% of the total cost. The taxes by the state are different, but on average, they are responsible for 20 to 25% of the amount. Thus, more than 50% of the fuel price goes in the form of taxes for the government.

What are Fuel Taxes?

Every person who buys fuel for heating homes, vehicles, or any other reason is charged in the form of taxes. These taxes are responsible for generating revenue for the country. This amount is also used for reducing greenhouse gas emissions and consumption of fossil fuels.

Fuel taxes are indirect taxes charged by the Government of India on the consumption of fuel. Mostly, these taxes are levied on transportation fuels like gas, petrol, and diesel. These fuels are used in the places listed below.

• Industrial vehicles
• Agricultural vehicles
• Home heating
• Home lighting
• Industrial heating
• Industrial lighting
• Electricity generation at subsidised, usual, or lower rates

The main focus is always on the sales tax levied on the prices of fuel. These taxes are responsible for increasing the final price of products that come under petroleum. These are coal, charcoal, gas, kerosene, petrol, and diesel. In this, the tax connected with electricity and the sector of oil or gas is not connected.

The government of any country uses the amount generated by fuel taxes to correct the failures of the market. This money is also used for mobilising fiscal resources. The government can charge excise duty over VAT or GST. Many other forms of taxes are collected in the form of maintenance, congestion, carbon, and road taxes. Federal, municipal, state, and regional government bodies also receive a proportion of these taxes.

Since 2014, the excise duty has seen a rise of ten times until 2020. In July 2020, the excise duty on diesel was noted to be Rs. 31.83. On petrol, Rs. 32.98 was charged as the excise duty. Major debates started taking place over the price of petrol and diesel in India. Understanding the mechanism of fuel price determination is very important before judging the central or state government moves of the price hike.

India is responsible for producing only 20% of the total requirement of the country’s oil. The remaining content is imported from countries like Saudi Arabia and Iraq. Traditionally, Saudi Arabia has been the major exporter of oil to India. However, in the financial year 2018, Iraq became the top exporter of oil to India. In the financial year 2021, India has purchased 30.9 million tons of oil from Saudi Arabia while it has bought 38.9 million tons from Iraq.

Price Determination of Crude Oil in India

One barrel of crude oil equals 159 litres. The amount of crude oil is always calculated in terms of dollars per barrel. For understanding the calculation of fuel taxes in India, it is important to know the following basics.

Consider the price of crude oil in the international market to be $71 for one barrel. The total cost for the crude oil becomes $72.5 when the ocean freight of $1.5 is added to each barrel.

For the sake of understanding, let us consider the exchange rate of INR to USD to be $1=Rs.68 at a constant rate. Using this number, the price of crude oil comes to be Rs.4930 for one barrel; thus, the price for one barrel of crude oil becomes Rs.31.

If the price of one litre of crude oil is Rs.31, how does the price increase to reach around Rs.71? To understand this, consider the following points.

• Entry cost, refinery processing cost, and other operational costs = 2.62/litre of petrol and 5.91/litre of diesel.
• Transportation, freight, and margin cost of oil marketing companies = 3.31/litre petrol and 2.87/litre diesel.
• After adding the refining cost, the basic cost of petrol becomes 36.93/litre petrol and 39.78/litre diesel.
• Central Government’s road cess and excise duty = Rs.19.48/litre petrol and Rs. 15.33/litre diesel.
• Before VAT is charged, the price taken from the dealer is Rs.56.41/litre petrol and Rs.55.11/litre diesel.
• The commission of petrol pump dealers in Delhi = Rs.3.62/litre petrol and Rs.2.52/litre diesel.
• Before VAT is charged, the fuel cost = Rs. 60.03/litre petrol and Rs.57.63/litre diesel.
• Considering 25% VAT on petrol and 16.75% on diesel. Also, adding Rs.0.25 as pollution cess with surcharges = Rs.16.21/litre petrol and Rs.9.91/litre diesel.
• Now, the final retail price becomes = Rs.76.24/litre petrol and Rs.67.45/litre diesel.

The maximum proportion of the amount charged to the customer is taken by road cess and excise duty charges. The Central Government is responsible for these charges. The second contributor is the VAT charged by the state government, in this example, Delhi.

Summarising the concept, we see that the consumer pays Rs.35.69/litre petrol as the tax on the total amount of Rs.76.24. As visible from the numbers, the tax charged by the government is way more than the original price of crude oil.

The price of crude oil is different in different states and Union Territories of India. This is because the VAT charges are different in every region. The highest prices of diesel and petrol are always in the states in which the government charges a huge portion of state taxes.

Do We Only Pay for Petrol/Diesel?

Since December 2017, India has been selling petrol by adding 10% ethanol. When consumers purchase one litre of ethanol, they are charged Rs.76.24, but the cost of one litre is Rs.41. So now if you look at the concept, you will notice that the consumer pays for 20 litres of petrol when he only receives 18 litres of petrol and 2 litres ethanol.

The excise duty incidences on diesel have increased to reach Rs.31.83 per litre. Similarly in May 2020, the excise duty on petrol has increased to reach Rs. 32.98 per litre.

The tax revenue generated from India’s petroleum sector has significantly increased post the introduction of GST (Goods and Services Tax). In the last 10 years, petroleum taxes have been responsible for more than 2% GDP of the country. At this moment, if we consider the entire excise collected by the Government of India, we will notice that 85-90% of the total amount is collected from petroleum taxes. From the financial year 2015 to 2020, the excise revenue received by the government has increased by more than 94%. The increase in VAT by the State Government was about 37% in the same period.

India ranks very low in affordability of petrol. In India, the cost of one litre of petrol in 2017-18 was approximately 25% of the average daily gross domestic product (GDP) per person. Considering the variations in the VAT charges of every state, we could see a large variation in the price of fuel. In this way, we have learned the proper distribution of taxes charged on fuels.

Also read:

What Happens to Indian's Tax Money after Payment?
How Many Types of Taxes are There in India?
Why are imports heavily taxed in India?
Why Do We Pay Income Tax in India? Importance, Applicability & more

FAQs

Q. What percentage of tax does the government charge on fuel?

Ans: The Central Government of India charges about 25% on the price of petrol and diesel, whereas the State Government charges about 20-25% in the form of VAT.

Q. Can fuel charges be reduced in the country?

Ans: Yes. If the government reduces 50% of the taxes charged by it, we can reduce the fuel prices by Rs.20/litre in the country.