The price of petrol and diesel is decided by these 8 factorsImage Credit source: Getty Images
As soon as the prices of crude oil fall in the international market, the biggest hope of the common people is that petrol and diesel will also become cheaper. But this does not always happen in India. The reason for this is that the retail price of petrol and diesel in the country is not determined only by the price of crude oil, but eight big factors including tax, refining cost, transportation expenses, rupee-dollar exchange rate and pricing strategy of oil marketing companies (OMCs) work behind it. The government has clarified in Parliament that the prices of petrol and diesel in India are market-determined and are decided by public sector oil marketing companies. When necessary, the central government provides relief to consumers by changing the tax structure. Let us understand.
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These are the 8 big factors that decide the price of petrol and diesel.
1. Price of crude oil in the international market
The main raw material for making petrol and diesel is crude oil. If its price increases, fuel can become expensive and if it decreases, there is a possibility of its price decreasing. However, in India its effect is not visible directly and immediately.
2. Exchange rate of rupee and dollar
India imports most of its crude oil needs and is paid for in dollars. If the rupee weakens against the dollar then imports become expensive. In such a situation, even if crude oil is cheap, the relief in fuel prices may be limited.
3. Refining Cost
Crude oil is processed in refineries to convert it into petrol and diesel. The cost of this process is also added to the final price.
4.Freight and Transportation Cost
The cost of transporting fuel from the refinery to depots and petrol pumps across the country is also a part of the price. There may be a difference depending on distance and logistics.
5. Margin of oil marketing companies
Companies like Indian Oil, Bharat Petroleum and Hindustan Petroleum decide the prices considering the market conditions, inventory costs and international conditions.
6. Dealer Commission
Petrol pump operators get a fixed commission on every liter of petrol and diesel. This amount is also included in the retail price.
7. Central Government Excise Duty
The central government imposes excise duty on petrol and diesel. When the government cuts this tax, consumers usually get relief.
8. State Government VAT and other taxes
Every state imposes VAT and other local taxes accordingly. This is the reason why the prices of petrol and diesel are different in different states.
How many types of taxes are imposed?
Tax is the biggest contributor to the price of petrol and diesel. Mainly two types of taxes affect the consumer.
- Central government excise duty
- State Government VAT (Value Added Tax)
Apart from this, the government also gets huge income from the petroleum sector in the form of cess, custom duty, IGST, CGST, royalty and other charges on crude oil. According to the data presented in Parliament, the Central Government received a total revenue of more than Rs 4.75 lakh crore from the petroleum sector in 2025-26 (provisional).
How many types of taxes on petrol and diesel?
| tax/fee | 2025-26 (Rs crore) |
| excise duty | 3,08,381 |
| crude oil cess | 17,744 |
| custom duty | 15,091 |
| IGST | 20,310 |
| CGST | 11,695 |
| royalty | 8,214 |
| NCCD | 1,205 |
How much does the government earn from the petroleum sector?
| financial year | Total Revenue to Central Government (Rs. Crore) |
| 2021-22 | 4,92,302 |
| 2022-23 | 4,28,067 |
| 2023-24 | 4,32,394 |
| 2024-25(P) | 4,24,827 |
| 2025-26(P) | 4,75,739 |
Why do prices not decrease even when crude oil becomes cheap?
This is the biggest question. Even if the price of crude oil decreases, the prices of petrol and diesel do not decrease immediately because the government and oil marketing companies do not only look at the international price. They also take into account tax structure, rupee position, stock of expensive crude already purchased, refining costs and global uncertainties. Sometimes the government does not change the tax to maintain the revenue balance, while sometimes the oil companies wait for the old stock to be exhausted. Therefore, it may take time for the full benefits of the decline in the international market to reach consumers.
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When did the government give relief?
The government told Parliament that in November 2021 and May 2022, the Center had reduced excise duty by a total of Rs 13 per liter (petrol) and Rs 16 per liter (diesel) respectively, the full benefit of which was passed on to consumers. In March 2024, oil marketing companies reduced the price of both petrol and diesel by Rs 2 per liter. At the same time, in March 2026, when crude oil became expensive in the international market due to the West Asia crisis, the government reduced the excise duty by Rs 10 per liter to provide relief to the consumers, which also affected the government revenue.
That is, the price of petrol and diesel in India is not determined only by crude oil. International market prices are important, but the final retail price is influenced by many factors such as taxes, exchange rates, refining and transportation costs, dealer commission and strategies of oil marketing companies. This is the reason that despite crude oil being cheaper in the world, Indian consumers do not get immediate relief in the prices of petrol and diesel.
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