India struck out consumption tax on gasoline and diesel and imposed a windfall tax on refined diesel and jet fuel exports to prevent higher gas station prices and ensure sufficient supplies in the domestic marketas the effective closure of the Strait of Hormuz in the middle of a war in West Asia disrupts supplies. The net return from these decisions is expected to be around ₹5,500 crore every fortnight.
The special additional excise duty on petrol has been reduced ₹3 from ₹13 liters, the Ministry of Finance said in the gazette on Friday. Duty on diesel has been reduced to zero ₹10 per liter.
Separately, the government imposed additional duties on diesel exports ₹21.5 liters and on the air turbine at ₹29.5 liters. These “unexpected” levies were last imposed in 2022 during the height of the Russia-Ukraine war and were withdrawn in 2024. The government will review the levies every two weeks.
“This will ensure sufficient availability of these products for domestic consumption,” said the finance minister Nirmala Sitharaman said in a post on X.
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However, the government did not impose an unexpected tax on the sale of domestic crude oil by oil and gas companies, which was introduced in 2022 and repealed in 2024.
to be sure a reduction in the duty on gasoline and diesel on the domestic market will not lead to a corresponding reduction in retail fuel prices from current levels. The government’s move aims to reduce pressure on oil marketing companies (OMC) and mitigating the need to raise gas station prices warranted by higher global oil prices. However, it puts pressure on the government’s short-term fiscal calculations.
The closure of the Strait of Hormuz during the Iran war pushed oil prices higher, with Brent May trading at $111.47 on the Intercontinental Exchange on Friday, up 3.20% from its previous close. Despite US President Donald Trump’s repeated mentions of peace talks, there has been no let-up in Israeli and US strikes and retaliation by Iran.
Achieving sales
The total income to the exchequer in a fortnight would be approx ₹7,000 crore due to reduction in central excise duty, while the export tax windfall would bring ₹1,500 crore, Vivek Chaturvedi, chairman of the Central Board of Indirect Taxes and Customs, said while addressing the media on Friday. This would result in a net loss ₹5,500 crore every fortnight to the government.
“After this crisis, there has been a significant increase in crude oil prices. There has also been a higher increase in petrol, diesel and jet fuel prices. This creates a market and also creates an incentive for refiners to export at higher international prices,” Chaturvedi said. “The government’s response to this has been very calibrated. Yesterday we came up with some export duties in the form of special additional excise duties and road and infrastructure duties.”
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Minister of Petroleum In his post on X, Hardeep Singh Puri said: “The government has taken a huge hit in its tax revenue to ensure that the very heavy losses of the oil companies are reduced at this time of skyrocketing international prices. At the same time, an export tax has been imposed as international prices of petrol and diesel have skyrocketed and every refinery exporting to foreign countries will have to pay an export tax.”
According to the ministry’s statement, at current international oil prices, the insufficient yield is hovering around ₹26 per liter for petrol and ₹81.90 per liter of diesel and the combined daily under-recovery absorbed by the Oil Marketing Companies (OMCs) is about ₹2,400 million crowns. “The reduction in consumption tax will make up for it ₹10 per liter of these losses, ensuring that OMCs can continue to supply fuel without interruption while keeping retail prices unchanged,” he said.
Fiscal impact
Experts pointed out that the net loss of income ₹5,500 crore in a fortnight as a result of the tax changes on petroleum products is quite significant and that it will change the government’s trajectory of fiscal consolidation outlined in the Union Budget for FY27.
Excise restructuring needs to be viewed through the lens of macroeconomic stabilization rather than fiscal orthodoxy, said Rishi Shah, partner and head of economic advisory services at Grant Thornton Bharat.
“These are clearly exceptional circumstances and require agility on the part of policymakers. The government appears willing to tolerate a slight deviation from its fiscal path to protect households and firms from inflationary shocks,” Shah said. “While this may mean a slightly higher deficit in the near term, maintaining consumption and growth momentum takes precedence in such an environment.”
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Meanwhile, Sujata Sharma, joint secretary in the petroleum ministry, said the rule that mandates refiners to sell at least 50% of their total petrol exports and 30% of their diesel exports domestically continues.
Facilitate the supply of commercial liquefied petroleum gas (LPG), the government on Friday increased the allocation of commercial LPG cylinders to states to 70% of the average consumption in the last six months from 50%. Initially, the government limited supplies to 10% of average consumption, which was gradually increased.
