Economy

With Petrol Prices up to Rs 100/Litre in Some States, How Much of it Is Tax?

Over 50%, in some states.

This article was originally published on February 17, 2021 and is being republished on February 19, 2021.

New Delhi: Petrol and diesel prices have surged in India over the last six weeks, largely tracking a rise in global prices, with Brent crude oil crossing $63 a barrel two days ago and gaining nearly over 50% since October 2020 so far.

A quick perusal of daily auto fuel rates show that since January 1, 2020, the prices of petrol and diesel in Delhi have gone up nearly six rupees. And in the last year alone, the rise has been nearly Rs 15 (Delhi).

On Wednesday, the price of petrol and diesel were again hiked by 25-26 paise, with petrol prices in Delhi at Rs 89.54 per litre and in Mumbai, hitting close to Rs 96 per litre.

The global rally in Brent crude is just one factor though in the prices of petrol and diesel hitting all-time highs. With auto fuels hitting the Rs 90 and Rs 100 mark in certain cities across the country, all eyes are back on the punishing central government and state taxes that make up a significant portion of what customers pay at the petrol pump.

In India, while oil marketing companies like Indian Oil Corporation are theoretically free to set their own prices for petrol and diesel – based on international prices – the fact that state and Centre taxes make up a significant portion of the retailing price mean that Indian customers don’t really see the benefit of price decontrol.

This has been particularly clear over the last year, with the price of global crude going topsy-turvy due to the COVID-19 pandemic. Even though the price of India’s crude basket crashed to $19 in April 2020, the price of auto fuels fell on average a little over 6 rupees in the case of both petrol and diesel.

In fact, the Centre took the decision to raise the excise duty on petrol (Rs 13 per litre) and diesel (Rs 15 per litre) in two instalments in March and May 2020 to shore up its revenues in the wake of the lockdown.

Just how much do you pay in taxes?

The tables below show the price break-up of petrol and diesel (Delhi). According to Indian Oil, the retail selling price of petrol on February 16 was Rs 89.29. Out of this, a whopping Rs 53.51 is because of VAT (value-added tax) and excise duty.

Source: Indian Oil Corporation data.

Source: Indian Oil Corporation.

That means nearly 60% of the price that you paid at a Delhi petrol pump yesterday was due to taxes that your local government and central government chose to levy on you.

For diesel, the calculation is similar, with taxes constituting nearly 55% of the price.

But why so much variation across the country?

In Madhya Pradesh and Rajasthan, the prices of certain types of auto fuels (namely premium petrol) have already crossed the Rs 100-mark in the last week. But even with major metropolitan cities, wide variations are seen; for example the difference between petrol in Delhi and Mumbai.

This is because while petrol and diesel attract a uniform central excise duty, their prices differ from state to state because of the differences in local levies or value-added tax.

Source: Petroleum Planning and Analysis Cell.

As the table above shows, Madhya Pradesh and Rajasthan have relatively higher state levies. There is also a broad variation within different states.

Higher taxes, good or bad?

There are two schools of economic thought. Since 2014, the Narendra Modi government has chosen to mostly increase central government taxes on petrol and diesel, quite significantly, and not pass on the benefits of lower global prices to Indian consumers. This can be seen as a strategy to shore up government revenues and free up resources that could be invested in infrastructure development, as oil minister Dharmendra Pradhan regularly points out when asked by reporters.

Some economists also note that a higher tax on petroleum products is good for the environment and doesn’t really affect India’s poorest, but instead pinches the pockets of the middle-class instead.

Other experts, however, point to the inflationary consequences of such high auto fuel rates and note that it also impacts the agriculture and manufacturing sectors. With no income tax relief in the Union Budget as well, a cut in the prices of petrol and diesel could reduce the burden on the middle-class.