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Relation Between High Fuel Prices & Indirect Taxes

Feb 15, 2019 | 1 year ago | Read Time: 3 minutes | By iKnowledge Team

Are you worried about the soaring fuel prices that are creating havoc on your monthly budget? Wondering why the government cannot just reduce the fuel prices? Here is decoding the link between fuel prices and indirect taxes to give you all the answers.

Fuel prices


Irrespective of your financial status or earnings, rising fuel costs affect almost everyone. There is a direct correlation between fuel prices and the operating cost of your car or ticket rates for public transport. Such has been the growing surge in fuel costs that petrol and diesel prices have touched their highest levels since 2013. Many times the argument is made that the fuel prices mirror the costs of international crude oil market. What many people overlook is the indirect tax component. So here is an insight into what indirect taxes are and how fuel costs are fixed.

Pricing of fuel products in India

Oil, being an international commodity, has multiple aspects that impact pricing. Indian fuel prices are fixed by what is known as the ‘dynamic fuel pricing’ system, where the Oil Marketing Companies (OMCs) calculate the oil price every day depending on the international crude oil prices, currency exchange, demand supply ratio and other financial parameters. The retail price that you get in your nearest petrol pump is inclusive of indirect taxes including excise duty; value-added tax and the dealer’s commission. The excise and VAT vary from state to state.

Indirect taxes and their impact on oil prices

While the Central Government applies excise duty of fuel, State Governments add a value-added tax (VAT). VAT rates also vary drastically on both petrol and diesel across India. Various State Governments fix the VAT percentage as per their own economic dynamics.

For example, VAT in Punjab is 36%[1] for petrol and 17.22% on diesel while in neighbouring Haryana petrol VAT is 26.25% while that on diesel is 17.22%. The national capital Delhi offers a 27% VAT for petrol and 16% for diesel. The governments earn revenue on account of such taxation which is then used for developmental works. 42% per cent of excise duty collections are also forwarded to various states while the Central Government uses the remaining 58% for various developmental schemes.

VAT on petrol & diesel

Source: Indian Money

What the government can do to bring down fuel prices

Since India does not have huge oil reserves and more than 80% of its fuel needs are powered by imports, there is a not a lot that India can do in terms of international oil prices. The following chart shows India’s rising energy needs and increasing oil imports.

india is hungry

Source: Times of India

The only viable option is to cut down on indirect taxes like excise duty and VAT. Since the government is highly dependent on the revenue it earns from these taxes, it is highly unlikely that a drastic rate cut may be on the cards.

Meanwhile, you can protect your family against inflation and uncertainty by looking at an investment plan. In parallel, a good insurance plan like the Term Insurance Plan from Aegon Life safeguards your family in your absence, with a premium of as low as Rs. 462 per month.

However, attempts are being made to reduce the tax burden on fuel. The Central Government is advocating to bring petroleum products under the GST regime which can potentially lower the taxation aspects of fuel products. This would mean a single tax instead of two taxes on excise duty and state VAT which can potentially result in the lowering of the final price for consumers.

Since states are reliant on revenue from petroleum products, it may still take a while to work out the financial dynamics between the states and the Center. The rate of GST for petroleum products holds the key on whether it would result in lowered prices.





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