India has slashed excise duty on petrol and diesel and imposed a windfall tax on the export of refined diesel and jet fuel to prevent higher pump prices and to ensure sufficient supplies in the domestic market, as the effective closure of the Strait of Hormuz amid the West Asia war disrupts supplies. The net revenue hit from these decisions is expected to be around ₹5,500 crore every fortnight.
The special additional excise duty on petrol was cut to ₹3 from ₹13 a litre, the finance ministry said in a gazette notification on Friday. The duty on diesel was slashed to nil from ₹10 a litre.
Separately, the government imposed additional duties on the export of diesel at ₹21.5 a litre and on aviation turbine at ₹29.5 a litre. These 'windfall' levies were last imposed in 2022 during the peak of the Russia-Ukraine war and were withdrawn in 2024. The government would review the levies every two weeks.
"This will ensure adequate availability of these products for domestic consumption," finance minister Nirmala Sitharaman said in a post on X.
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The government, however, has not imposed the windfall tax on the sale of domestic crude by oil and gas companies, which was imposed in 2022 and withdrawn in 2024.
To be sure, the duty cut on petrol and diesel in the domestic market will not lead to a corresponding reduction in retail fuel prices from current levels. The government’s move is aimed at reducing the pressure on oil marketing companies (OMCs) and easing the need to raise pump prices warranted by higher global crude prices. It, however, puts pressure on the government’s near-term fiscal calculations.
The closure of the Strait of Hormuz during the Iran war has pushed crude prices higher, with the May Brent contract on the Intercontinental Exchange trading at $111.47 on Friday, up 3.20% from its previous close. There has been no let-up in Israeli and US strikes and retaliation by Iran despite US President Donald Trump’s repeated mentions of peace talks.
Revenue hit The total revenue hit on the government's exchequer in a fortnight would be about ₹7,000 crore due to the cut in central excise, while the windfall tax on exports would bring about ₹1,500 crore, said Vivek Chaturvedi, Central Board of Indirect Taxes and Customs chairman, while addressing the media on Friday. That would result in a net loss of ₹5,500 crore every fortnight to the government.
“Following this crisis, there has been a significant surge in crude prices. There has also been a higher surge in the prices of petrol, diesel and aviation turbine fuel. This creates a market and it also creates an incentive for the refineries to be exporting at higher international prices,” Chaturvedi said. “The government's response to that has been very calibrated. Yesterday, we came up with certain export duties in the form of special additional excise duties and a road and infrastructure cess.”
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Petroleum minister Hardeep Singh Puri, in a post on X, said: "Government has taken a huge hit on its taxation revenues to ensure very high losses of oil companies at this time of sky-high international prices are reduced. At the same time, export tax has been levied as international prices of petrol and diesel have skyrocketed, and any refinery exporting to foreign nations will have to pay export tax.”
According to a ministry statement, at current international crude prices, under-recoveries stand at around ₹26 per litre on petrol and ₹81.90 per litre on diesel, and the combined daily under-recovery absorbed by oil marketing companies (OMCs) is about ₹2,400 crore. "The excise reduction offsets ₹10 per litre of these losses, ensuring OMCs can continue to supply fuel without disruption while keeping retail prices unchanged," it said.
Fiscal impact Experts pointed out that a net revenue loss of ₹5,500 crore a fortnight on account of the tax changes on petroleum products is quite significant and that it will alter the government’s fiscal consolidation trajectory outlined in the Union budget for FY27.
The excise duty restructuring must be viewed through the lens of macroeconomic stabilisation rather than fiscal orthodoxy, said Rishi Shah, partner and economic advisory services leader at Grant Thornton Bharat.
“These are clearly exceptional circumstances and need agility on the part of policymakers. The government appears willing to tolerate a modest deviation from its fiscal path to shield households and firms from inflationary shocks,” said Shah. “While this may imply a somewhat higher deficit in the near term, preserving consumption and growth momentum takes precedence in such an environment.”
Meanwhile, Sujata Sharma, joint secretary in the petroleum ministry, said the rule that mandates refineries to sell a minimum of 50% of their overall quantum of petrol exports and 30% of the diesel exports in the domestic market continues.