The Fuel Excise Duty Cut

Source: BS

Subject: Economy

Context: The Indian government has reduced excise duty on petrol and diesel by ₹10 per litre to shield consumers and Oil Marketing Companies (OMCs) from rising global crude prices.

About The Fuel Excise Duty Cut:

What it is?

• An excise duty is an indirect tax levied by the Central Government on the manufacture or sale of specific goods within the country.
• In this recent move, the government slashed the duty to ease the financial burden on OMCs, bringing the excise on petrol down to approximately ₹3 per litre and effectively reducing the diesel excise to zero.

How Fuel Prices are Derived in India?

Crude Oil Cost:

• This is the raw material price. Since India imports approximately 85% of its oil, this cost is highly sensitive to global benchmarks (like Brent Crude) and the USD-INR exchange rate.
• A weaker Rupee automatically makes fuel more expensive, even if global oil prices remain flat.

Refinery Transfer Price (RTP):

• Once crude arrives, it must be processed. RTP is the price charged by refineries to Oil Marketing Companies (OMCs).
• It includes the actual cost of refining (turning crude into petrol/diesel), plus ocean freight, insurance, and port charges.

OMC Margin:

• Oil Marketing Companies (like IOCL, BPCL, and HPCL) add an operational margin to cover their own costs.
• This includes the expense of transporting fuel from refineries to storage depots and then to petrol pumps, as well as their corporate overheads and profit.

Central Excise Duty:

• This is a fixed-rate tax levied by the Union Government. Unlike some taxes that are a percentage, this is usually a specific Rupee amount per litre.
• It includes basic duty, the Road and Infrastructure Cess (RIC), and the Agriculture Infrastructure and Development Cess (AIDC).

Dealer Commission:

• This is the earnings paid to the petrol pump owner. It covers the cost of running the station, employee wages, electricity, and the dealer’s profit margin. It is revised periodically by the government.

State VAT (Value Added Tax):

• This is an ad valorem tax (a percentage) imposed by individual State Governments. Because it is a percentage of the sum of all previous costs, the tax amount increases as the base price rises.
• This is why fuel prices vary significantly between states like Goa (lower VAT) and Rajasthan or Maharashtra (higher VAT).

Fuel Price Breakdown (Percentage Share)