Retail Diesel Price Determination in India

The retail selling price of diesel is the amount a consumer pays per litre at a fuel station. It combines the oil company's fuel price, dealer commission and applicable Union and state taxes; therefore, it is not determined by the crude-oil price alone.

Pricing framework

Diesel prices were deregulated in 2014, allowing public-sector oil marketing companies to determine prices according to market conditions rather than an administratively fixed selling price.

• Public-sector oil marketing companies introduced daily price revision in 2017, replacing the earlier fortnightly revision system.
• Daily revision provides a mechanism for adjusting prices, but it does not mean that pump prices must change every day or immediately follow every movement in crude prices.

The fuel-price component

Oil companies consider international diesel prices and the rupee-dollar exchange rate when determining domestic prices. Diesel is a refined product, so its international price can move differently from crude-oil prices.

• The price charged to dealers reflects the company's pricing of the fuel and relevant supply, freight and marketing costs.
• Crude-oil prices influence the cost of producing diesel, but refining conditions and demand for petroleum products also influence international diesel prices.
• A weaker rupee raises the rupee value of dollar-denominated international prices, potentially offsetting a decline in those prices.

Taxes, commission and the final price

The basic price build-up is: price charged to dealers excluding excise duty + Union excise duty + dealer commission + state VAT and applicable local levies = retail selling price.

• Union excise duty, including applicable cesses, adds to the fuel-price component and is generally specified as an amount per litre.
• State VAT or sales tax differs across states; its rate and calculation base affect the final pump price.
• Dealer commission remunerates the fuel-station dealer and forms part of the price paid by consumers.
• Diesel is outside the operative GST levy; Article 279A(5) provides for the GST Council to recommend the date from which GST should be levied on it.

Why prices differ or do not fall proportionately

Different state taxes and supply costs explain why diesel prices can differ across locations. A fall in international prices need not produce an equal percentage fall at the pump because taxes and dealer commission remain part of the final price.

• Changes in tax rates, exchange rates and oil-company pricing decisions can reinforce or offset changes in international fuel prices.