Petrol: What are we paying for? - Views on News from Equitymaster

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Petrol: What are we paying for?

Feb 12, 2007

Petroleum products have strongly pervaded our daily lives, more so diesel and petrol. We know that the oil marketing companies are losing money on the sales of these products due to high crude oil prices internationally. But have we ever thought about the break-up of the price we pay for these fuels. In this write-up, we have made an attempt to identify the different components of the price of petrol and throw some light on each of them. Petrol/ Motor spirit is the fuel used for transportation purposes. We all use it to run our cars, motor cycles etc. Every time we run out of petrol, we get the tank refilled at the prevailing prices. We have never thought about what are we paying for. But do you know the basic cost forms less than half of the selling price and the rest is accounted for by taxes.

While people in Delhi have to pay roughly Rs 44.9 (current price for unbranded petrol), the actual cost or the basic cost amounts to around Rs 22, while excise duties, sales tax and custom duties account for remaining Rs 16, Rs 6 and Rs 0.9 respectively.

Break-up of the selling price of the petrol*
Particulars % of selling prices
Basic cost excluding Taxes 48
Excise duty 35
Sales Tax 15
Custom Duty 2
Total 100
* On the basis of prices in Delhi.

The basic cost components of the price are crude oil prices, processing costs and margins of refineries. Excise duty is levied on the processing of crude into its various derivates. Sales tax is the taxes levied by various states on the end price. It is a major component due to which prices of the petroleum products differ across states. Price of petrol in Mumbai is higher compared to that in Delhi due to the same reason.

Excise duty as % of selling prices…
Year Excise duty
on petrol ( Rs)
Selling prices
( year end)
Excise as % of
selling prices
FY00 5.99 25.94 23.1%
FY01 5.32 28.75 18.5%
FY02 8.02 27.54 29.1%
FY03 10.96 33.49 32.7%
FY04 11.79 33.71 35.0%
FY05 12.27 37.84 32.4%
FY06 14.81 43.49 34.1%
FY07( upto Nov. 2006) 15.11 44.85 33.7%
* On the basis of prices in Delhi.

Currently, the excise duty on petrol is a mixture of fixed and advalorem duty. While the advalorem duty is 8%, the fixed component is Rs 13 per litre. This is considerably higher and as a consequence, the excise duty from petroleum products form roughly 45% of the total excise collection of the government. It should be pertinent to add that excise duty collections have grown at the lowest rate amongst the top five taxes levied by government, presumably on the back of higher evasion rates. Thus, excise duty on petroleum products is unlikely to be lowered much as this would lead to the government's finances being further stretched.

Thus, we expect the excise duty on petrol and diesel to be reduced marginally in the forthcoming budget. Therefore, the same is not going to have significant impact and if crude prices stay high for long, subsidies will continue to hurt the profitability of the OMCs.

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