In a key fiscal move that could impact fuel prices across the country, the Government of India has increased excise duty on petrol and diesel by Rs 2 each, effective from April 8, 2025. The update was officially published in a notification issued by the Department of Revenue under the Ministry of Finance.

This revision comes just months after the government scrapped the windfall profit tax on crude oil and petroleum product exports, including diesel, petrol, and jet fuel (ATF), in December 2024.

New Fuel Duty Structure Kicks in

The new excise duty hike applies to both petrol and diesel, marking a notable shift in the government’s taxation strategy for energy products. As per the latest notification, the increase of Rs 2 per litre will come into effect on April 8, 2025, and is expected to influence retail fuel prices and potentially impact inflationary trends.

Background: End of Windfall Profit Tax

In December 2024, the government abolished the windfall profit tax on:

• Domestically-produced crude oil

• Exports of diesel, petrol, and aviation turbine fuel (ATF)

The move was in response to a decline in international crude oil prices, which had reduced the extraordinary profits that companies were earning on exports.

The windfall tax regime was introduced on July 1, 2022, as part of a global trend where governments sought to capture a share of the super-normal profits being made by energy companies during the commodity boom post-pandemic and amid the Russia-Ukraine conflict.

What is Windfall Profit Tax?

A windfall profit tax is a special levy imposed on companies that earn unexpectedly high profits, typically due to external market conditions rather than internal business performance. In India's case, the tax applied to:

• Oil producers making high margins on domestic crude sales

• Exporters of fuel products when global prices soared

Why the Hike in Excise Duty Now?

With the rollback of the windfall profit tax, the government has now shifted back to indirect taxation like excise duty to maintain revenue from the petroleum sector.

The decision to raise excise duty by Rs 2 on both petrol and diesel is likely aimed at:

• Offsetting the revenue loss from the withdrawal of the windfall tax

• Meeting fiscal targets amid increasing public expenditure

• Preparing the groundwork for new subsidies or social schemes

This fiscal adjustment comes at a time when crude oil prices remain volatile, and global economic uncertainty continues to affect India’s import bill.

Impact on Consumers and Economy

Immediate effects for consumers:

• Retail petrol and diesel prices may rise across states, depending on whether oil marketing companies (OMCs) pass the cost to consumers.

• Transport and logistics costs may increase, potentially leading to a rise in prices of goods and services.

• Inflationary pressure could resurface, especially if crude oil prices climb again in the international markets.

Sectoral impact:

• Oil marketing companies (like Indian Oil, BPCL, HPCL) might witness short-term margin fluctuations.

• Transport and freight operators may revise service charges.

• Agriculture and logistics sectors could face operational cost hikes, especially during the sowing season when diesel demand rises.

State Taxes May Add Further Pressure

In addition to central excise, state governments levy VAT on fuel, which varies from one state to another. Hence, the final price paid by consumers could see significant variation based on local tax rates.

States with higher VAT like Maharashtra, Andhra Pradesh, Telangana, and Rajasthan may witness steeper pump prices compared to states with lower VAT.

Timeline of Fuel Taxation Adjustments

• July 1, 2022: India imposed windfall profit tax on crude oil and fuel exports.

• Multiple revisions were made between 2022 and 2024 based on global price changes.

• December 2024: The windfall tax on crude oil and fuel exports was fully scrapped.

• April 8, 2025: A Rs 2 excise duty hike per litre on petrol and diesel is to be enforced.

Revenue Generation Vs Inflation Management

The excise duty hike signals the government’s balancing act between revenue generation and inflation control. While the removal of windfall tax reduced burden on energy companies, the excise duty increase is a more predictable and consistent source of revenue for the exchequer.

However, with general elections on the horizon and global economic uncertainties still looming, the government will need to closely monitor the inflationary impact and make adjustments as needed.

Conclusion

The Indian government’s move to increase excise duty on petrol and diesel by Rs 2 per litre marks a strategic pivot in fuel taxation policy. It follows the December 2024 decision to remove windfall profit taxes, suggesting a shift back to indirect tax mechanisms to bolster revenue.

For consumers, this change may lead to higher fuel bills, depending on how oil companies adjust retail pricing. For the government, it's a calculated step to balance fiscal needs with economic stability.

As the policy landscape continues to evolve, it remains critical for businesses and consumers alike to stay informed about fuel price trends, tax policy changes, and their broader economic implications.

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