India may cut taxes on petrol and diesel; timing uncertain

India’s finance ministry is considering cutting excise duties on petrol and diesel to cushion the impact of record high domestic prices. A doubling in the price of crude oil over the past 10 months has contributed to record fuel prices at gas stations in India. Retail prices of petrol and diesel are hovering near Rs 100 a litre across the country. 

Taxes and duties account for roughly 60% of the retail price of petrol and diesel in the country, the world’s third largest consumer of crude oil. As the coronavirus pandemic hit India’s economic activity the government twice raised taxes on petrol and diesel in the last 12 months to boost sagging tax revenues instead of passing on the benefits of low oil prices last year to consumers.

India’s Finance Ministry has now started consultations with some states, oil companies and the oil ministry to find the most effective way to lower the tax burden on consumers without federal finances taking a big hit. However, it is believed the government wants oil prices to stabilise before cutting taxes, as it does not want to be forced to change the tax structure again, should crude prices rise further.

India’s Finance Minister Nirmala Sitharaman recently said: “I can’t say when we will reduce taxes on fuel, but the centre and states have to talk to reduce fuel taxes”. A decision on fuel taxes may only be made following a meeting of OPEC and major oil producers, also known as OPEC+. There is hope that OPEC+ would agree to ease oil output curbs, and crude prices will stabilise. 

India has called on OPEC+ to ease production cuts as higher crude prices are hitting fuel demand in Asia’s third largest economy and are contributing to inflation.

The high fuel prices have prompted some Indian states to cut state-level taxes on petrol and diesel to rein in prices. The Union government levies Rs 32.90 per litre of excise duty on petrol and Rs 31.80 a litre on diesel.

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