What are the tax elements in petrol and diesel retail pricing?

Petrol and diesel retail pricing in India has four-tax related elements, divided between the Union and the State governments.

The Centre levies a multi-layered excise duty comprising Basic Excise duty, Special Additional Excise duty, Agriculture Infrastructure & Development Cess, and Road & Infrastructure Cess.

Effective March 26, 2026, the government significantly reduced the “Special Additional Excise Duty” (SAED) to offset rising global crude oil prices.

States levy Value Added Tax (VAT) or Sales Tax on the sum of the base price, freight, dealer commission, and central excise duty. Because VAT is often a percentage (ad valorem), rates vary significantly by state.

While not a tax, a mandatory component added to the final price is dealer commission. It typically ranges from ₹2.50 to ₹4.50 per litre for petrol and slightly less for diesel.

Will the slashing of excise duty on petrol and diesel mean a cut in retail price?

New Delhi’s message was clear when announcing the duty cut: “Retail pump prices of petrol and diesel will not change. The excise reduction is not being passed on as a price cut at the pump.”

What it does is it reduces the under-recoveries being absorbed by public sector oil marketing companies (OMCs) — Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation — who have continued to supply fuel to Indian consumers at prices well below their cost of supply.

According to the government, at current international crude prices, under-recoveries stand at approximately ₹26 per litre of petrol and ₹81.90 per litre of diesel. The combined daily under-recovery being absorbed by OMCs is approximately ₹2,400 crore. The excise reduction offsets ₹10 per litre of these losses, ensuring OMCs can continue to supply fuel without disruption while keeping retail prices unchanged.

What is under-recovery?

Under-recovery in the Indian oil sector is the difference between the cost price (what it costs to produce/ import fuel) and the selling price realised by Oil Marketing Companies (OMCs) such as Indian Oil, BPCL, and HPCL.

Simply put, it is the revenue shortfall that occurs when the government keeps retail fuel prices lower than international market rates to protect consumers.

Number crunchers in the Ministry of Petroleum & Natural Gas will define it as: Under Recovery = Total Desired Price (Market Rate) – Selling Price at Depot.

The desired price is calculated using Trade Parity Pricing (TPP), which considers international prices, freight, insurance, and customs duty. Historically, under-recoveries are shared by three entities -- the Government: Through direct cash subsidies or tax cuts; Upstream Companies: Companies like ONGC and OIL often provide crude oil at discounted rates to OMCs; and the OMCs themselves absorb the remaining portion, which can lead to high debt levels and reduced capital expenditure.

Is it actually a loss?

Experts say there is a technical difference. Under-recovery is a shortfall against a perceived market-linked price. The marketing companies may still be operationally profitable if their actual refining costs are lower than the international benchmarks used in the formula. While actual loss is when the selling price falls below the actual cost of production and procurement.