What Happened
- The central government slashed excise duty on petrol by ₹10 per litre, reducing the Special Additional Excise Duty (SAED) from ₹13 to ₹3, and eliminated excise duty on diesel entirely, amid a surge in global crude oil prices triggered by the US-Israel war on Iran.
- The reductions are designed to absorb mounting under-recovery losses of state-run oil marketing companies (OMCs) — Indian Oil Corporation, BPCL, and HPCL — and keep retail pump prices unchanged for consumers.
- Simultaneously, the government reimposed a windfall tax (export duty) on fuel products: ₹21.5 per litre on diesel and ₹29.5 per litre on aviation turbine fuel (ATF), preventing domestic refiners from profiting by diverting cheaper domestically-processed crude to international markets.
- Exports of diesel and ATF to four neighbouring countries — Nepal, Bhutan, Bangladesh, and Sri Lanka — are exempt from the new export levies to maintain regional stability.
Static Topic Bridges
Excise Duty on Petroleum Products in India
Central excise duty on petrol and diesel is composed of multiple layers: Basic Excise Duty (BED), Special Additional Excise Duty (SAED), Road and Infrastructure Cess, and Agriculture Infrastructure and Development Cess (AIDC). Crucially, only the BED component is shareable with states under the constitutional devolution formula; the revenue from cess and surcharges is retained entirely by the Union government. This structure gives the Centre significant fiscal flexibility to adjust fuel taxes without affecting the divisible pool. Petrol and diesel were excluded from the GST framework, keeping them under the legacy Central Excise Act.
- Post-cut petrol excise structure: BED ₹1.40 + SAED ₹3 + Road & Infrastructure Cess ₹5 + AIDC ₹2.50 = ₹11.90/litre total
- Diesel excise duty: reduced to nil (from ₹10+ per litre previously)
- Revenue from cess (AIDC, Road Cess) is NOT shared with states — remains with the Centre
- Petrol, diesel, and ATF remain outside GST; states retain power to levy VAT on them
Connection to this news: The government exploited the non-divisible cess architecture to cut the SAED — the component it controls entirely — minimising the fiscal concession it makes to states while fully absorbing the hit on OMC under-recoveries.
Windfall Tax (Special Additional Excise Duty on Exports)
India pioneered the windfall tax on fuel exports in July 2022 — one of the first countries globally to do so — after private refiners like Reliance and Nayara Energy were found to be exporting fuel at high international prices while domestic consumers faced shortages. The levy functions as an export duty specifically targeting the "windfall" profit accruing from the gap between domestic crude procurement costs and elevated international product prices. It was withdrawn in December 2024 when the price differential normalised, and has now been reimposed in March 2026 as the Iran war re-created exactly that gap.
- First imposed: July 1, 2022; withdrawn: December 2024; reimposed: March 27, 2026
- Current rates: Diesel — ₹21.5/litre; ATF — ₹29.5/litre; petrol — nil
- Mechanism: Reviewed every fortnight based on crude and product price differential
- Exemption: PSU-to-PSU exports to Nepal, Bhutan, Bangladesh, Sri Lanka
Connection to this news: By simultaneously cutting domestic excise and reimposing the export levy, the government created a dual-lever policy: lower cost for domestic OMCs + prevent refiners from arbitraging the international price spike.
Oil Marketing Companies (OMCs) and Under-Recovery
India's three state-run OMCs — IOCL, BPCL, HPCL — sell petroleum products at government-mandated retail prices that are sometimes below the actual cost of production and distribution. The difference is termed "under-recovery." During periods of high crude prices, OMCs absorb under-recoveries on the exchequer's behalf, often resulting in large quarterly losses. In extreme cases, the government compensates them through direct subsidy transfers or by reducing excise duty to lower their input-side cost burden.
- India imports ~85% of its crude oil requirement (approximately 230 million tonnes/year)
- Fiscal cost of the excise cut: approximately ₹1.55 lakh crore annualised
- OMCs together refine ~70% of India's total petroleum output
- Brent crude crossed $100/barrel following closure of the Strait of Hormuz (February 28, 2026 onwards)
Connection to this news: The excise cut does not lower pump prices — it reduces the gap between OMC procurement cost and the mandated retail price, preventing the companies from slipping into insolvency-level under-recoveries.
Key Facts & Data
- SAED on petrol cut from ₹13/litre to ₹3/litre (reduction of ₹10/litre)
- Diesel excise brought to zero; previous SAED on diesel was approximately ₹10/litre
- Export duty on diesel: ₹21.5/litre; on ATF: ₹29.5/litre (reinstated March 27, 2026)
- Estimated annualised fiscal revenue loss to Centre: ~₹1.55 lakh crore
- Strait of Hormuz carries approximately 20–25 million barrels per day of crude and LNG globally; India sources ~40% of its crude imports through this route
- Crude oil above $100/barrel as of late March 2026 — first time since mid-2022