How Petrol and Diesel Are Taxed

How central excise duty and state VAT make up a large share of petrol and diesel prices, why fuel is kept outside GST, and how fuel taxes fund governments.

A large share of what you pay for petrol is tax.

The structure

Central excise duty: a fixed amount per litre.
State VAT: a percentage, varying by state.
Together, taxes can be around 40 to 50 percent or more of the retail price.

Revenue

Fuel taxes are a major source of revenue for both the Centre and states.
When oil prices fell in 2020, the Centre raised excise duties, capturing the windfall.

Outside GST

Petrol, diesel, crude oil, natural gas and jet fuel remain outside GST.
States resist including them because they’d lose control over a big revenue source.

Price differences

Petrol prices differ across states due to VAT differences.

Economic view

Fuel taxes discourage consumption and pollution.
They’re somewhat regressive, hitting commuters and truckers.

Cuts

Governments cut excise in 2021 and 2022 when prices soared.

The pump bill

A driver paying 100 rupees for a litre of petrol pays a large share in central excise and state VAT, not just for the fuel itself.

Thinking petrol prices reflect only crude oil

Taxes make up a large share.

Key takeaways

Excise and VAT make up a large share of fuel prices.
Fuel taxes are big revenue sources.
Petrol and diesel are outside GST.
Prices differ across states due to VAT.