FUEL TAXES

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Context

Petrol is retailing at more than Rs 100 a litre across India. The primary reason for the increase in pump prices over the past few years is the gradual rise in the Union government’s excise duty component.

Taxes and duties on petrol and diesel

Taxes, in India, the price of petrol and diesel is dependent on international product prices, rupee-dollar exchange rate and other factors like dealer margin and freight charges.
Petrol and diesel do not come under the purview of goods and services tax (GST).
Taxes make up around 50% of the retail price.
Public sector Oil Marketing Companies (OMCs) revise the retail prices of petrol and diesel in India on a daily basis, according to changes in the price of global crude oil.
The price charged to dealers includes the base price set by OMCs and the freight price.
The central government taxes the production of petroleum products, while states tax their sale.
The central government levies an excise duty on petrol and on diesel. These make up around 31% and 34% of the current retail prices of petrol and diesel, respectively.
While excise duty rates are uniform across the country, states levy sales tax/ Value Added Tax (VAT) which varies across states.
For instance, Odisha levies 32% VAT on petrol, while Uttar Pradesh levies 26.8% VAT or Rs 18.74 per litre, whichever is higher.
In addition to the tax rates many state governments, such as Tamil Nadu, also levy certain additional levies such as cess (Rs 11.5 per litre).
Note that unlike excise duty, sales tax is an ad valorem tax, i.e., it does not have a fixed value, and is charged as a percentage of the price of the product. This implies that while the value of excise duty component of the price structure is fixed, the value of the sales tax component is dependent on the other three components, e., price charged to dealers, dealer commission, and excise duty.

Example of Break-up of Prices

The Petrol & Diesel prices have 4 different components. Here is an explanation of these components:

Price Charged to Dealers: The Oil Marketing Companies or OMCs as they are called charge this price to the dealers. IOCL, HPCL & BPCL may charge a marginally different price to the dealers because of various other factors. This price is arrived at based on factors like Global Crude oil price of the Indian Basket, price incurred on freight, exchange rate of US Dollar, price incurred on refining etc.
Central Excise Duty: The Central Excise Duty is levied by the Central Government (Government of India). This is a fixed amount and not a percentage on the price. The excise duty on Petrol increased from Rs 9.48 per liter to a high of Rs 21.48 per liter by January 2016. In October 2017, the excise duty on Petrol was reduced by Rs 2 per liter, the first such reduction by the current BJP government. On the other hand, the duty on Diesel increased by more than 4 times from Rs 3.56 per liter to a high Rs 17.33 per liter. Like Petrol, the duty was reduced by Rs 2 per liter in October 2017 to Rs 15.33 per liter.
Dealer Commission: This is the amount of commission paid by the OMCs to the petrol pump dealers. The dealers manage all their expenses with this commission.
State specific VAT/Sales Tax: The State Governments levy Value Added Tax (VAT) or sales tax on the price arrived at by adding dealer price, central excise duty & dealer commission. This is usually a mix of percentage & a fixed amount. The State VAT on petrol is at least 25% in 21 states with the highest in Mumbai at 39.54%. The State VAT on diesel is more than 20% in 14 states and highest of 28.31% in Andhra Pradesh.

Example of price break:

Fuel levies as revenue share

Excise duty and VAT on fuel constitute an important source of revenue for both the Centre and the states.
Excise duty on fuel makes up about 18.4% of the Centre’s gross tax revenues.
Petroleum and alcohol, on an average, account for 25-35% of states’ own tax revenue, as per the RBI’s Study of Budgets 2020-21. Of the revenue receipts of states, central tax transfers comprise 25-29%, and own tax revenues 45-50%.
Petroleum taxes with states are shared out of basic excise duty. The Centre also levies additional excise duty and cesses on petroleum products.
The levies on fuel and liquor have also become an important source of revenue for states as other indirect tax revenue is routed through the GST regime.
States apply an ad valorem VAT or sales tax on the base price, freight charges, excise duty and dealer commission on petrol and diesel. Therefore, state collections also rise as the Centre hikes excise duties.

How are Fuel Prices Determined in India?

Fuel rates are revised everyday at 06:00 AM in India,and this is called dynamic fuel price method.
This makes sure that variations of global oil prices throughout the day are transmitted and reflected to fuel users and dealers.

India imports 80 percent of crude oil. We process this crude oil in our domestic refineries to generate petroleum products. A large share of our petrol comes via this process. In fact, we barely import any petrol or diesel. This crude oil goes through three stages of the transaction before it comes to your automobiles in the form of petrol and diesel.

How can Government controls Prices of Fuels?

Central government’s tool to control prices of fuel is Excise Duty.
State government’s tool to control prices of fuel is VAT.

Who is the official regulator of Fuel prices in India?

Apart from taxes, Central government regulates the prices of fuels through base prices and cap prices at which dealers and OMCs deal with each other, decided by PPAC (Petroleum Planning and Analysis Cell) under Ministry of Petroleum and Natural Gas.
Apart from this there are many licenses, regulations, laws applicable to refineries, OMCs, dealers, etc. and after passing through all this processes we get our tank filled with the fuel.

How Retail Price Of Petrol & Diesel Calculated?

Fuel rates are decided by oil marketing companies. State-owned oil marketing companies (OMCs).Since they aren't government regulated anymore, it's the responsibility of the oil companies to adjust prices according to global rates.
The retail price of fuel is decided according to the rolling average of international benchmark prices over the previous 15 days; new prices come into effect at 6 am every day.
However, the state and central governments takes taxes on the retail price of petrol and diesel.

Fuel prices in India are one of the highest taxed in the world. The amount we pay for 1 Liter fuel consists of average 70% taxes.

Important terms related to Fuel Pricing

Oil Refineries: These refineries buy or extract crude like WTI (West Texas Intermediate) Crude, Brent Crude, OPEC Basket crude, etc. and convert these crudes into petrol, diesel, Aviation turbine fuel, Biofuels, etc.

Examples of such refineries are Reliance Industries, Nayara Energy, Bharat Petroleum, Indian Oil, Shell, ONGC, Saudi Aramco, etc.

OMC (Oil Marketing Companies): These are the companies who market the converted crudes (petrol, diesel, etc.) to dealers and ultimately to users.

Examples of such refineries are Indian Oil, Bharat Petroleum, Shell, Essar, etc.

Dealers: Dealers are the People who are engaged into business of buying fuels from OMCs and distributing them to users. They are distributors of fuel.

Example: Arvind Patel and Pravin Patel are distributors of cars of Maruti Suzuki Co., they are called dealers of the company and runs the business known as ‘Patel Motors’.

Users: We are the users of fuel for our vehicles, also the airplane transport companies who buys the aviation turbine fuels from OMCs directly to keep their planes flying through the skies.

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