Inside India’s Petrol Pricing System and the Tax Divide Driving State Gaps

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Michael Kern

5 min read

India’s fuel market is sending a confusing signal right now. The Iran war has pushed global oil markets into shock, the Indian oil basket has surged above $150 a barrel, and the risk to key supply routes through the Middle East is rising. Yet at the pump, prices have barely moved.

That disconnect is exactly where this story begins, because petrol prices in India do not move the way most people assume they do. They are based on a formula that is filtered through taxes, logistics, and policy choices that can dramatically change what consumers actually end up paying.

The starting point is crude oil. India imports more than 80% of the crude it consumes, which means global oil prices set the tone for everything that follows. When Brent or the Dubai Oman benchmark rises, India feels it quickly. But there is no direct one-to-one passthrough. Since crude is purchased in dollars, the rupee dollar exchange rate is part of the story too. A weaker rupee raises the cost of imports even if crude prices are flat, while a stronger rupee can offset some of the pressure.

Then comes refining and transport. Crude does not go straight into a consumer’s fuel tank. It is imported, processed at refineries, and then moved through depots and distribution networks before it reaches retail outlets. By that stage, the price already includes the cost of crude, freight, import charges, refining, inland transport, and the marketing margins of the oil companies.

From there, India’s three dominant oil marketing companies (Indian Oil, Bharat Petroleum, and Hindustan Petroleum) take over, together controlling about 90% of the retail market. These companies revise petrol and diesel prices every morning at 6 a.m. under the dynamic pricing system introduced in 2017. That system replaced the older model under which prices were revised every two weeks. In principle, it was meant to align domestic fuel prices more closely with international crude movements and currency shifts.

But that is only part of the picture.

The Tax System That Splits the Market

The real divergence comes when taxes are added.

The retail price of petrol in India is built on a straightforward structure: the base fuel price, plus central excise duty, plus dealer commission, plus state VAT. The first three are relatively easy to understand. The last one is what creates the big differences across the country.

The central government’s excise duty is largely uniform, but state VAT isn’t. Each state government sets its own VAT rate based on its fiscal needs, and fuel remains one of the easiest and most dependable sources of tax revenue. That is why petrol prices can vary so sharply from one state to another, even when the underlying fuel cost is almost the same.

As of March 2026, the gap is large. Petrol prices range from roughly ?82 a litre in Andaman and Nicobar to more than ?109 in Andhra Pradesh, with many large states clustered above ?100. That is a spread of more than ?25 a litre for essentially the same fuel. Crude oil does not explain that difference. State taxation does.

This is also why the question of GST keeps coming up. If petrol were brought under the GST regime, prices would likely become more uniform across India. But states would lose a major revenue lever. For that reason, the current structure remains in place, and consumers continue to face different prices depending on where they fill up.

There are other smaller factors that can influence the final number. Areas farther from refineries or depots can carry somewhat higher transport costs. Dealer commissions can vary slightly. Local distribution costs matter at the margin. But these are secondary. The main reason petrol prices differ state by state is taxation.

How India Is Smoothing the Oil Shock

That also helps explain the current puzzle: if crude has surged so sharply, why have retail prices remained steady?

The answer is that the daily pricing mechanism is not always applied in a purely mechanical way. Oil marketing companies can absorb part of the shock, at least for a time, especially during periods of extreme volatility. That appears to be what is happening now. Refiners are taking some of the pressure on their own books, inventories remain available, and the government is clearly trying to avoid an immediate pass-through to consumers.

India has handled fuel pricing this way before. Prices are officially deregulated, and the daily pricing model remains in place, but in practice there is room for delay, smoothing, and political judgment. Consumers are shielded from sudden spikes, but that also means they do not always receive the full benefit when global prices fall.

So what determines petrol prices in India? At the broadest level, it comes down to three layers. Global crude prices and exchange rates set the base cost. Oil marketing companies calculate and revise prices under the daily dynamic pricing system. Then taxes—especially state VAT—determine what consumers actually pay.

And why does petrol price differ from one state to another? Because India does not really have one unified fuel market. It has multiple tax regimes sitting on top of the same fuel supply chain. The crude may be global, the refining system may be national, and the pricing mechanism may be updated daily, but the final bill is still heavily shaped by the state.

That is why petrol prices in India can move slowly when oil surges, and why the same litre of fuel can cost dramatically different amounts depending on where you buy it.

By Michael Kern for Oilprice.com

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