Economics Prelims cum Mains

It’s hard to cut fuel price


  • Even as petrol and diesel climbed to all-time highs and the Opposition protested across the country, the government ruled out any immediate reduction in excise duty in order to bring down the retail prices of auto fuels, and instead urged the states to take action.


Price Buildup of Petrol and Diesel

Sale Price = Dealer Price + Central Excise + Dealer Commission + State VAT



Why government can’t do much to reduce the taxes on auto fuels?

  • Taxes on petrol and diesel are a key revenue source for both the Centre and states, and a cut will hit their fiscal position.
  • Crude petroleum attracts 20% oil industry development cess, and a National Calamity Contingent Duty (NCCD) of Rs 50 per metric tonne.
  • Rates of state sales tax or Value Added Tax (VAT) vary from state to state.
  • Unlike excise duty, VAT is ad valorem, and results in higher revenues for the state when rates move up.
  • Most states that impose the highest tax rates on petrol and diesel are struggling with high gross fiscal deficit as a percentage of their GDP.
  • The Centre have to bear some direct costs, since all fuel product prices are not market-linked.
  • Kerosene and LPG prices continue to be regulated, with the government subsidising these products, to protect society’s weaker sections.
  • The depreciating currency and rising crude oil and gas prices will only raise the government’s subsidy burden on these two items.
  • Higher oil prices and capital outflows push up inflation eventually increasing the government’s borrowing costs.



  • There’s no Customs duty on crude, but petrol and diesel attract a Customs duty of 2.5%.
  • Besides taxes, the Centre and the states have other earnings, too, from the petroleum sector i.e. dividend income, dividend distribution tax, corporate/income tax and profit on exploration of oil and gas.


Is bringing Petrol and Diesel under Goods and Service Tax (GST) a solution?

  • LPG, kerosene, naphtha, furnace oil, and light diesel oil attract GST, but five other petroleum products i.e. crude oil, high speed diesel, motor spirit (petrol), natural gas, and aviation turbine fuel, lie outside the new tax regime.
  • The Constitution (One Hundred and First Amendment) Act, 2016 empowers the GST Council to recommend the date on which these five items are to be brought under GST.
  • While natural gas and jet fuel will likely be the first of the five to enter the GST tent, contingent upon approval by the GST Council, neither the Centre nor the states have so far been forthcoming on including these five petroleum products in the new indirect tax regime.
  • Even if petrol and diesel are included under GST, prices are unlikely to fall. This is because of the GST principle of keeping rates close to the earlier tax rates.
  • Bringing petrol and diesel under GST would not have a big impact on prices, as states will levy additional taxes to boost revenues. As it is the main source of revenue for the states.

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