How Are Petrol Prices Determined in India?

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1994
Source: The Independent

Petrol is one of the commodities in India which has been kept out of recently introduced GST or the Goods and Service Tax ambit. In fact, there is a whole different structure of petrol pricing in India because of which Indians are paying more taxes than the cost of obtaining petrol fuel.
Price of petrol for common people or technically known as the Retail Selling Price of Petrol in this country is set based on various factors including international price of crude oil, OMC margin, transportation cost, freight cost, taxes, excise duties and more.

Crude Oil

Petrol is extracted by refining crude oil. India obtains 75% of the crude oil through imports. Domestic companies which cater 25% of India’s crude oil requirements include Reliance industries, Cairn India Ltd., Oil India, ONGC and few others. One barrel of Crude Oil costs about Rs 4200. One barrel of crude oil is equivalent to 159 litres of petrol which means cost per litre of crude oil is equal to Rs 26.42.

OMC Cost

Crude oil is bought by OMC or Oil Marketing Companies which take care of the refinement of crude oil into petrol and then selling it further to the dealers. Their costs include transportation cost, freight cost, refinery processing cost, entry fee and other operational costs. In India, three of the oil marketing companies hold 95% share of the market. These companies are Bharat Petroleum Corporation Limited, Indian Oil Corporation Limited and Hindustan Private Corporate Limited.

Additional Costs

According to the Budget 2018, the excise duty on petrol has been reduced by Rs 2 per litre but the government of India has introduced a road cess of Rs 8 per litre. This has contributed in an increase in petrol prices in India.

VAT

VAT or value added tax on petrol differs from state to state in India. This is the reason why petrol prices differ across the country. The following graph shows the differences in petrol prices across different cities located in different states.

 

The following table shows the simplified calculation chart for petrol prices in New Delhi, India.

  Petrol Price
Crude Oil
International Price of Crude Oil with Ocean Freight (as on 3rd February 2018) Rs 4200 or $65.5
1 Barrel of Crude Oil 159 Litre
Crude Oil – Cost per Litre Rs 26.42/litre
 
OMC Cost
OMC Margin, Transportation, Freight Cost Rs 3.31/litre
Refinery Processing, Entry Tax, Landing Cost & other operational costs Rs 4.75/litre
Cost of Petrol after Refining Cost Rs 34.48/litre
Additional Costs
Excise Duty + Road Cess as charged by Central Government Rs 19.48/litre
Price charged to Dealers (before VAT) Rs 53.96/litre
Dealer’s Retail Price
Commission Rs 3.59/litre
Petrol Cost before VAT Rs 57.55/litre
Additional VAT (varies from state to state) – 27% in New Delhi + Pollution Cess Rs 15.54/ litre
Final Retail Price ( as on Feb 3, 2018) Rs 73.09/litre

 

Petrol prices in India are rising and they are the highest among the South Asian nations. Few months back, state-owned oil companies of India moved away from their old practice of revising petrol rates each 1st and 16th of every month and as an alternative, adopted a ‘daily petrol price revision system’ wherein prices are revised on a daily basis and changes in cost are reflected instantly.
Daily revision of petrol prices immediately passes the benefit of international cost reduction to consumers. However, in spite of daily price revisions, petrol prices in India are still rising. Reasons to this include, as stated above increase in crude oil prices from $45/barrel to $63/barrel, rise in Petrol Pump Commissions, introduction of Road Cess and more.

Author | Ranu Jain