Finance Minister Palaniappan Chidambaram said he wanted to abolish a 6 percent excise duty on sales of petrol and diesel while raising the flat rate component by 1.35 rupees (3 cents) a litre.
B. Mukherjee, director of finance at Hindustan Petroleum Corp, said the move would be budget neutral and was aimed at streamlining duty payment procedures.
Measures in the budget have to be approved by parliament.
Chidambaram, presenting the fifth and last full budget of the left-leaning ruling administration, said the change would not impact pump prices.
"I propose to abolish ad valorem part of excise duty on unbranded petrol and unbranded diesel. And replace the same by equivalent specific duty of 1.35 rupees per litre," Chidambaram told lawmakers.
Chidambaram said after the implementation of the new duty structure total excise duty on petrol would stand at 14.35 rupees per litre, while unbranded diesel would attract duty of 4.65 rupees per litre.
Shares in many oil firms dropped between 3 to 5 percent after the budget failed to meet oil industry demands, which had expected a reduction in state levies and steps to encourage more investment in the oil and gas sector.
By 2:10 p.m. the BSE oil index was down nearly 3 percent with Bharat Petroleum Corp Ltd falling nearly 5 percent to 443 rupees, while top explorer Oil and Natural Gas Corp slipped 3.2 percent to 1,006 rupees.
Hindustan Petroleum Corp fell 3.2 percent to 291.50 rupees.
India raised fuel prices by about 4 percent -- or 2 rupees for petrol and 1 for diesel -- earlier in February, the first increases in 18 months.