Govt cuts excise duty on petrol and diesel, but pump prices will remain the same: Here's why

The government has slashed the special additional excise duty on petrol to Rs 3 a litre and exempted diesel from the duty. While this is a significant tax cut, consumers may not see a drop in retail prices at the pump immediately.

This is because the government's move is aimed at shielding consumers from the impact of rising global crude oil prices amid the ongoing war in West Asia rather than lowering the existing rates.

Key reasons for no immediate price drop

Global crude oil prices have risen by almost 50 per cent since the United States and Israel launched military strikes against Iran on February 28, triggering sweeping retaliation from Tehran. International oil prices touched $119 per barrel earlier this month on the intensifying Iran war, before pulling back to around $100 a barrel.

India imports 88 per cent of its crude oil needs and roughly half of its natural gas requirement. These mostly come via the Strait of Hormuz. Following the US and Israeli attacks on Iranian government, military and nuclear facilities, Iran warned shipping away from the strait, and insurers withdrew coverage, effectively halting tanker movements.

State-run oil marketing companies (OMCs) like Hindustan Petroleum (HPCL), Bharat Petroleum (BPCL), and Indian Oil Corporation (IOC) have been incurring heavy losses as retail prices have remained frozen despite rising input costs. The duty cut is intended to "absorb" these losses to prevent a sharp spike at the pump.

In a post on X on Friday, Union Finance Minister Nirmala Sitharaman said the excise duty cut would “provide protection to consumers from rise in prices.”

She also said that Rs 21.5 per litre duty had been levied on diesel exports and a Rs 29.5 per litre duty on ATF, adding that this would ensure sufficient availability of these products for domestic use.

Duty cuts effective immediately

In a notification issued late on Thursday, the Finance Ministry cut excise duty to Rs 3 a litre, from Rs 13 earlier, while the levy on diesel has been slashed to nil from Rs 10 earlier. The duty cuts are effective immediately, the Ministry said.

Tracking the excise duty cut notification, shares of fuel retailers IOC, BPCL and HPCL opened higher on BSE on Friday.

Rating agency ICRA, in a note on Thursday, said if the average crude oil price goes up to $100-105/bbl, fuel retailers would incur a loss of Rs 11 per litre on petrol and Rs 14 per litre on diesel, respectively.

Nayara Energy, which operates 6,967 of India's 102,075 petrol pumps, has decided to pass on part of the increase in input costs to consumers and has raised petrol prices by Rs 5 a litre and diesel by Rs 3 litre. State-owned fuel retailers, who control about 90 per cent of the market, continue to keep the rates frozen.

Petrol at Nayara pumps now costs Rs 100.71 a litre and diesel costs Rs 91.31 per litre. A litre of normal petrol in Delhi continues to cost Rs 94.77, while the same grade diesel comes for Rs 87.67 a litre.