Few numbers irritate Indians more than the petrol price on the board outside the fuel station. At around 100 rupees a litre in most cities, petrol feels expensive – and Indians are right to suspect that the crude oil price is only part of the story. Fuel pricing in India is a layered construction: international crude, refining costs, freight, and then taxes – central excise and state VAT – that together often exceed the fuel’s base cost. Add dealer commissions and daily revision mechanics, and you have one of the economy’s most dissected price tags. Here is how it is built.

Layer one: from crude to the refinery gate

India imports over 85 per cent of its crude, so the starting point is the international price of the Indian crude basket – a blend reflecting what Indian refiners actually buy. Refineries convert crude into petrol and diesel at a processing cost, and the landed cost at the refinery gate includes freight, insurance and port charges. Oil marketing companies then apply the import parity and trade parity pricing concepts – benchmarked to international product prices – to arrive at the base price. When crude moves from 70 to 100 dollars a barrel, this base layer rises mechanically; when the rupee weakens against the dollar, it rises again, since crude is bought in dollars. These two variables – crude and currency – are the fundamental drivers, and both are entirely outside India’s control.

Layer two: the taxes that double the price

On top of the base price sit the taxes, and they are the largest single component. The centre levies excise duty (including the agriculture infrastructure cess and road and infrastructure cess) as a fixed amount per litre, while states levy VAT as a percentage – which means state tax revenue rises automatically when prices rise. Combined, central and state taxes typically account for 40 to 55 per cent of the retail price: on a 100-rupee litre of petrol, taxes can be 45 to 55 rupees. This is why Indian fuel is among the priciest in the region despite modest crude prices – and why fuel is the government’s most reliable cash cow, contributing lakh crores to central and state revenues. Bringing fuel under GST has been discussed for years, but neither the centre (which would lose excise) nor states (which would lose VAT autonomy) has been willing.

Layer three: dealers, freight and daily revision

The final layers are dealer commission – the petrol pump owner’s margin, fixed per litre and revised periodically – and freight equalisation elements. Since June 2017, prices have been revised daily at 6 am based on the previous day’s international benchmarks and currency rates, replacing the old fortnightly revision. In practice, however, daily revision has often been paused – during elections, during crude spikes, oil companies have frozen prices for weeks or months, absorbing losses or profits with an eye on politics as much as economics. Diesel, used by trucks, tractors and industry, gets parallel treatment, and its price moves have economy-wide inflation effects that petrol’s do not.

Why prices feel sticky on the way down

• Taxes are mostly fixed per litre (centre) or percentage-based (states), so crude falls do not translate proportionally to retail falls.
• Oil companies use stable periods to recover past losses from frozen-price episodes.
• Governments rarely cut taxes when crude falls – the revenue is too convenient – though they face pressure to cut when crude rises.
• State VAT differences explain the 5 to 10 rupee per litre variation between cities.

The next time the board price changes, read it as a composite: global crude, the rupee, central excise, state VAT, dealer margin. Only the first two are set by markets; the rest are policy choices – which is why fuel pricing will always be as much politics as economics.

FAQs

Why is petrol cheaper in some states?

State VAT rates differ widely – states with lower VAT or specific rebates show lower retail prices. The base price and central taxes are uniform nationally.

Will petrol come under GST?

The GST Council can decide this, but consensus has eluded it for years – both the centre and states fear revenue losses. For now, fuel stays outside GST.

Who sets the daily price?

Oil marketing companies revise prices daily based on international benchmarks, though the government influences timing through its ownership of the major marketers.

Compiled by the Khabar 24h Editorial Desk from publicly available sources.