AnalysisEnergyOil and Gas

How much tax do you pay on petrol/diesel in India?

Prelude

Do you know how much you have to pay for 1 liter of petrol nowadays in India? And how much portion goes into the tax to the government? How much tax do you pay on petrol/diesel in India? Percentage-wise speaking, you end paying anywhere near 70% of what you pay for 1 liter of fuel as tax to the government. Well, if you have been following the headlines recently, you must be thinking of buying a bicycle or an electric car. The fuel prices in India are literally skyrocketing for the past few months. The uprising is mainly because of the inferior tax structure of the central as well as state government.

We will see the exact tax structure in the following sections. But first, let’s have a look at fuel price trending in India in the past couple of years. So, how much tax do you pay on petrol/diesel in India?

Fig 1. – Petrol and diesel prices trend (10 years)

As you can see from the trend, there is a significant rise in the prices over the past 10 years. The prices of crude oil only have about a 40% influence on the actual price of petrol or diesel in India. However, the rest is controlled or affected by the tax structure of the government and seller’s commission. Also, the interesting point to note here is the government plays a significant role in controlling prices because they are the ones who are actually making contracts with Oil exporters and designing various policies around energy consumption.

Read MoreWhy Negative Oil Prices Does Not Mean Free Gasoline?

Where does India Stand?

As they say, the devil is in the details. The average consumer pays the government (Central + State) approximately 69% of the 1-liter petrol cost in India. Yes, you read that right. It is 69%. This is the highest in any part of the world. Given the fact that India only produces 20% oil of its requirement, India is a net oil importer. Therefore, India is open to geopolitical friction, market ups, and downs, and gets affected by periodically changing relations between dominating countries in the petroleum realm.

Read MoreOligopolistic Nature of Oil

Fig 2. – Fuel taxation across the world

Of Rs 83.71 for one liter of petrol in Delhi, according to data available on the website of the Petroleum Planning and Analysis Cell (PPAC), the oil itself is priced at Rs 26.34 per liter. The rest is taxes, duty, and dealer’s commission.

The adjoining graph shows various countries with their tax percentages per liter of petrol at the end consumer level. The US has the lowest % of tax among the countries whereas India has the highest followed by Italy, France, and Germany respectively.

How the price of Petrol and Diesel are determined?

  ParticularsPetrol PricesDiesel Prices
Crude oil prices in the international market (with ocean freight) $ 72.5 per barrel  Or  Rs. 4930 per barrel $ 72.5 per barrel  Or  Rs. 4930 per barrel
 1 Barrel is equal to    159 liter 159 liter
Crude oil cost per liter 31 per liter 31 per liter
 Basic Cost Calculation    
 Refinery processing, entry cost, landing cost, other operational costs along with margins 2.62 per liter 5.91 per liter
  Freight Cost, Transportation Cost and margin of Oil Marketing Companies 3.31 per liter 2.87 per liter
  Basic cost of fuel after refining cost 36.93 per liter 39.78 per liter
  Excise Duty + Road Cess charged by the Central Government 19.48 per liter 15.33 per liter
  The price taken from the dealer before the VAT is charged 56.41 per liter 55.11 per liter
  Dealer Retail Price Calculation – Location Delhi  
  Commission of Petrol Pump Dealers 3.62 per liter 2.52 per liter
  Fuel cost before VAT is charged 60.03 per liter 57.63 per liter
  27% VAT(different in every state) is  charged on the Petrol and 16.75% on the diesel + 25paise as pollution cess with surcharges 16.21 per liter 9.91 per liter
 Final Retail Price at the  petrol pumps in Delhi 76.24 per liter 67.54 per liter
Difference between base price and end consumer price40.24 per liter36.54 per liter
% of tax on base price109.0%91.9%
Table 1 – Tax structure in India

Note:- The numbers considered for the above calculation are for understanding purposes and updated as of June 2020. They may change according to periodic variations in government policies.

The above table clearly shows the exact calculation that goes into determining the price of 1-liter fuel. We can see that the percentage of tax basis the basic cost of petrol and diesel out of refinery is 109 % and 92% respectively.

Read MoreWhy Negative Oil Prices Does not Mean Free Gasoline?

Conclusion

In order to determine how much tax do you pay on petrol/diesel in India, let’s see the table above. From the above table, the maximum contributors in the tax were excise duty and road cess imposed by the central government and VAT per liter imposed by the state government. As of last week Jan 2021, a consumer is paying Rs. 90 per liter of petrol in Mumbai however crude oil is ranging somewhere around $55 per barrel.

Right now, the government has more elbow room to increase petrol and diesel prices by exercising the permission it had taken from Parliament in March this year. The government obtained parliamentary approval to increase the special excise duty on petrol by Rs 18 and on diesel by Rs 12. The earlier limit was Rs 10 for petrol and Rs 12 for diesel. In conclusion, if the government (central and state governments) reduce their taxes by 50% then the prices of petrol and diesel in each state can be reduced up to Rs. 20 per liter.

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