Analysing The Highest Ever Excise Duty Cut On Petrol, Diesel 

Taxes on petrol and diesel is charged as a percentage by State Governments in the form of Value Added Tax (VAT) and as a fixed amount by the Central Government as Excise Duty. 

Effective from 4th November 2021, the Central Government has reduced excise duty on petrol and diesel by INR 5 and 10, respectively per litre. The government said that the double reduction in the diesel cost would boost the farming sector during the upcoming Rabi season and has also urged State governments to reduce Value Added Tax (VAT) on petrol and diesel.  

PUMP PRICES TO DROP  
Price Build-Up in Delhi (Nov 1, 2021)  Value (Rs/litre)  
Elements  Petrol  Diesel  
Base price  47.28  49.36  
Freight etc  0.3  0.28  
Price to dealers (excl excise, VAT)  47.58  49.64  
Excise duty (Old)  32.9  31.8  
Excise duty (New)  27.9  21.8  
Dealer commission  3.9  2.61  
VAT (incl. VAT on dealer commission)  25.31  14.37  
Retail price  109.69  98.42  
Expected pump price drop (Rs/litre)  6.01  11.16  

The highest ever reduction in excise duty rolls back a part of the INR 13 and 16 per litre increase in taxes on petrol and diesel respectively effected between March-May 2020, when oil prices crashed owing to the pandemic. Last year, before revising excise duty on the upside, excise duties per litre were INR 19.98 and INR 15.83 for petrol and diesel, respectively, which went up by 65% to 32.98 for petrol and 79% to INR 28.35 for diesel. State governments also increased VAT during the year.  

Fuel prices have been soaring to record-high levels since the past few months, resulting in inflationary pressure. (Evident in the Wholesale Price Index (WPI)) data.  

The reduction in excise duty will come as a relief for the economy albeit with a revenue loss of almost INR 8700 Crore per month for the Central government (approx. 1 lakh Crore revenue loss per year). For the remainder of the current fiscal, the impact would be INR 43,500 Crore.