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The recent fall in the rupee and resultant attempts to thwart it by increasing fuel prices across the nation, led me wonder how petrol was priced and exactly how much goes to the government by way of taxes.

What is the retail price of fuel made up of?

The price of fuel at the retail station comprises the product cost, central government excise and taxes, State government taxes and operating costs and margin.

Almost half of what we pay goes as taxes. It is popular opinion that the burden on the customers can be reduced if both the Central and State governments reduce the levies charged by them on petrol. But since the governments have their compulsions in spending and they cannot, but charge the levies in order to meet the expenditure on the spending. The primary reason for high taxes is that excise tax and sales tax are the primary sources of revenue for both the Central and the State Government.

How are petrol prices decided in India?

I was surprised to read that:

  • When petrol prices go up or down they do so uniformly across the retail outlets of the three oil marketing companies — Indian Oil, Hindustan Petroleum and Bharat Petroleum.
  • There is no competition between the different OMCs in India.
  • The price that we pay for petrol (or for that matter diesel or aviation turbine fuel) has no resemblance whatsoever to its cost of production.
  • The oil companies simply take the price of petrol in the Singapore market, apply the rupee-dollar exchange rate to that price, add other costs such as freight and import duties and lo, there comes the price that they should charge domestic consumers. Interestingly, not a litre of the petrol that these companies sell in the market is imported from Singapore; they are all produced here in their own refineries.
  • The problem is that most often the price that they so arrive at has no relation to the prevailing domestic retail price, which is invariably lower. Thus is born the concept of “under-recoveries,” something that is unique to our oil companies. You should note that they don’t call this loss, simply because it is not a loss. A loss will be caused when a company is forced to sell a product below its cost of production. In this case, we have no idea what the cost of production is for petrol or diesel or, for that matter, any petroleum product.
  • Under-recoveries are therefore bogus numbers that bear no resemblance to reality. Yet, pricing decisions for the domestic market are based on these numbers.
  • The collusive pricing policy of the oil companies is an anti-competitive practice and has come under the radar of the Competition Commission in the past.

For detailed information refer to this article by Raghuvir Srinivasan published in The Hindu, dated December 4th, 2011.

The state of affairs is such that this day isn’t far…