West Asia conflict: Govt steps in to shield OMCs via big duty cuts

Move to cost exchequer ₹1.3 trn in FY27; export duty reimposed

Amid the war in West Asia and impending Assembly elections, the government on Friday announced heavy relief for oil companies, cutting special additional excise duty on petrol and diesel by ₹10 per litre.

 

In protecting consumers from a price rise, the government is likely to take a hit of around ₹1.3 trillion in FY27 as revenue losses due to the duty cut assuming excise duty remains same throughout the year. Excise duty is not ad valorem, meaning the rate will not change with changes in prices of the fuels.

 

In a notification dated March 27, the finance ministry said the special additional excise duty on petrol was reduced to ₹3 per litre from ₹13, and on diesel to nil from ₹10, with immediate effect. The government last revised excise duty on petrol and diesel in April last year, increasing it by ₹2 per litre each.

 

 

The government reintroduced export duties on diesel and aviation turbine fuel (ATF) to ensure their adequate availability in the domestic market. A duty of ₹21.5 per litre has been levied on diesel exports, while ATF exports will attract a duty of ₹29.5 per litre from nil.

 

India exported 14 million tonnes of petrol and 23.6 million tonnes of diesel between April 2025 and January 2026, mostly by Reliance Industries. 

 

“In view of the West Asia crisis, central excise duty on petrol and diesel for domestic consumption has been reduced by ₹10 per litre each. This will provide protection to consumers from rise in prices,” Union Finance Minister Nirmala Sitharaman said in a post of X.

 

Government officials estimated that the duty cut would result in a revenue loss of nearly ₹7,000 crore in 15 days, after which the situation would be reviewed, indicating that this was a temporary measure.

 

Central Board of Indirect Taxes and Customs Chairman Vivek Chaturvedi told reporters: “The government will continue to review the special additional excise duty, on diesel and ATF every fortnight … The situation is dynamic. We are living in difficult times.”

 

Petrol prices are determined through a daily dynamic system based on a 15-day rolling average of international crude oil prices, exchange rates, and taxes.

 

The final consumer price is a mix of the base price, central excise duty, dealer commissions, and state-level value-added tax (VAT).

 

For oil-marketing companies (OMCs) however, Chaturvedi said that duty cut was expected to result in revenue gains of around ₹1,500 crore for companies such as Indian Oil Corporation, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation in a fortnight.

 

Economists, however, estimated that the revenue losses to the government could be ₹1.3 trillion-1.7 trillion, assuming the cut is maintained throughout next financial year.

 

“The cut is going to support oil-marketing companies. Had this not been announced, the price rise would have passed on to the consumers,” said Yuvika Singhal, economist, QuantEco Research.

 

Experts say a greater fiscal cost for the government could reduce its capacity to do strong capital expenditure.

 

“There is likely to be a higher subsidy burden on the government on account of fertilisers. Therefore, revenue slippages could be higher. We have to see if expenditure cuts can meet these costs,” said Madan Sabnavis, chief economist, Bank of Baroda.

 

The government, for instance, pushed the pedal on capital expenditure in Budget 2026-27 with an 11.5 per cent increase in allocation to ₹12.2 trillion from ₹10.9 trillion in the revised estimates of FY26.

 

Economists say the revenue loss has an extreme impact on the fiscal numbers and if it remains so for the full year, it can add 0.3 to 0.4 per cent of gross domestic product to the deficit.

 

“Expenditure controls will be a government call, depending on the comfort of the fiscal-deficit level,” Sabnavis added.

 

The government is likely to mop up ₹1.65 trillion through special additional excise duty this financial year (2025-26), according to the revised estimates. For next financial year (2026-27), the government is budgeting ₹1.69 trillion.

 

Apart from special additional excise duty, the Centre also receives dividend from the petroleum sector. That stood at ₹22,000 crore in 2024-25 and ₹4,634 crore in the first half (April-September 2025) this financial year, according to the data sourced from Petroleum Planning and Analysis Cell.

 

On whether a part of the revenue loss will be offset by dividends, Singhal said: “Only if there is a de-escalation will the oil-marketing firms be able to make a profit later in the year to pass it on to the government. But there is no certainty to this situation.”

 

Since the onset of the West Asia conflict, the Indian crude-oil basket’s price has jumped to $117.09 per barrel in March 2026 from $69.01 in February 2026. The retail prices of petrol and diesel, however, have remained constant.

 

“If excise duty remains at the current level throughout FY27, it would cost the government ₹1.70 trillion. The cut is beneficial for the credit profile of oil-marketing companies. The retail prices remaining the same can complicate the fiscal arithmetic for FY27,” said Devendra Pant, chief economist, India Ratings & Research.