GST on Petrol – Why It's Still Outside the GST Regime

On 5 April 2025, Aarav filled his motorcycle tank in Sonipat at ₹103.24 per litre. He paid ₹20.00 per litre as central excise, and ₹18.00 per litre as state VAT, alongside dealer commission and other minor cesses. That morning, after a 30 km ride to work, he realised nearly 36% of what he spent was tax. If petrol were under GST,  say 28% GST plus compensation cess, the price might look different. 

Aarav jokingly wondered whether the new GST bill would come with a discount voucher. But the truth is, GST works differently. It allows input tax credits for businesses, reducing “tax-on-tax” across supply chains. So, while petrol in India currently is not under GST, the structure is changing. Let us break it down in detail, starting with why petrol is outside GST for now, and what it could mean if it joins under the slabs.

GST on Petrol – A Short Introduction:

In India, petrol and diesel remain outside the GST (Goods and Services Tax) system even as of June 2025. They continue to be taxed via central excise duty, state VAT, and other cesses. This has long been a deliberate exception, upheld by both central and state governments because these fuels are major contributors to state revenue.

Though the GST Council included a provision in the constitutional amendment allowing fuel to be under GST since July 2017, no formal decision has been made. The central government has expressed willingness, but states remain resistant, fearing revenue losses.

Price Components of Petrol (Delhi, approx.): 

To understand why petrol is expensive in India, it’s helpful to break down what contributes to the final pump price. A significant portion of the cost paid by consumers is made up of taxes, both central and state, as well as dealer margins.

Below is an approximate breakdown of petrol pricing in Delhi:
 

Disclaimer: This composition may vary from state to state depending on VAT rates and other state-level charges, but the overall structure remains fairly similar across India.

Read More – Rising Petrol & Diesel Prices Impact Your Monthly Budget?

HSN Codes for Petroleum Products:

Even though petrol is currently outside the GST regime, other petroleum products like lubricants and LPG are included and taxed under GST. These are classified using the Harmonised System of Nomenclature (HSN) codes, which help standardise taxation across goods.

The table below lists common petroleum products with their respective HSN codes and applicable GST rates:

These products fall under GST because they are not considered essential fuels in the same way as petrol or diesel, making them more manageable for the government to include in the GST net.

Types of Fuel and Tax Structure: 

Fuel in India is taxed differently based on its type and purpose. Some fuels are under GST, while others continue to be taxed through traditional means such as central excise and state VAT.

The table below outlines the tax applicability for various fuel types:
 

Disclaimer: CNG and piped natural gas are considered petroleum gas in the gaseous state, categorised under HSN code 27112100, and fall under the GST structure. Their lower tax rate makes them a more eco-friendly and cost-effective alternative to petrol and diesel.

Impact of GST on the Petrol Industry

The introduction of GST on petrol has been a long-standing topic of debate in India. While businesses and economists often advocate for it, state governments tend to resist, mainly due to financial reasons. Let's explore the potential impact from multiple angles.

• Revenue Concerns: Petrol and diesel are among the highest-taxed commodities in India. States levy a VAT ranging from 15 to 35% per litre, while the central government imposes an excise duty of around ₹20 per litre. Together, these taxes contribute to nearly 50–60% of the total retail price of petrol.

State governments rely heavily on VAT collections from fuel sales to finance welfare schemes, salaries, and infrastructure. If petrol were brought under GST, the states would have to share revenue with the centre under the current GST formula. This loss of independent control over taxation is a major roadblock.

• Tax Cascading Eliminated: One of the fundamental principles of GST is to eliminate the cascading effect of taxes, that is, tax on tax. At present, since petrol is not part of GST, businesses cannot claim any input tax credit (ITC) on petrol expenses, which inflates operational costs, especially in the transport and manufacturing sectors.

If petrol were included under GST, these industries could avail of ITC, thereby reducing their overall tax burden and promoting cost efficiency across supply chains. This would have a positive trickle-down effect on product pricing and inflation.

• Uniformity Across States: Currently, petrol prices vary drastically across states. This is due to the varied VAT rates imposed by state governments. For instance, VAT on petrol in Assam is “23.45% or ₹17.80 per litre, whichever is higher,” whereas in Delhi, it is only 19.4%. 

Including petrol in GST would introduce price uniformity across the country. Consumers would benefit from stable pricing, and businesses with pan-India operations would find it easier to manage logistics and costs.

Example: Many developed nations like the UK, Canada, and Australia include fuels under GST or VAT, using compensation models to protect local revenue. Canada offered CAD 4.3 billion to provinces like Ontario during HST rollout in 2010, while the UK uses grants to support local councils under its 20% VAT on petrol. 

If India adopts a similar model, a Revenue Neutral Compensation Scheme could be introduced—matching current VAT collections like Maharashtra’s ₹28,000 crore via grants or cess. Such an approach would ensure a smoother transition, provided strong coordination exists between the Centre and the states.

Input Tax Credit (ITC) on Petrol

The inability to claim Input Tax Credit (ITC) on fuel costs is a significant disadvantage for Indian businesses. This is particularly important for companies in logistics, transportation, mining, manufacturing, and construction.

Currently, No ITC: As petrol and diesel remain outside the GST framework, no ITC is available on these expenses. Businesses that spend significantly on fuel cannot offset these costs against their GST liability, which results in a higher overall tax outflow.

Also Read - GST on Electric Vehicles

If included: Reduced Operational Cost: Bringing petrol under GST would allow companies to claim ITC, thereby reducing their net cost. This could lead to an increase in capital expenditure on fleets, encourage investment in technology, and generally reduce the cost of end products and services.

Consideration: Compensation Mechanism for States: To make this transition financially viable, the GST Council would need to design a structured compensation mechanism for states. This could include revenue-sharing models, phased transitions, or a dedicated compensation cess to fund the gap.

Conclusion

The argument for including petrol in the GST is not so much a policy choice as an exercise in balancing economic efficiency with political preference. On the positive side, membership would introduce price uniformity, removal of tax cascading, and access to input tax credit, which would be highly beneficial to companies and possibly to consumers.

State governments worry about losing a great deal of money, money they have to use for government services and constructing roads and bridges. States will not make this change unless there is a good plan to assist them.

For individuals such as Aarav, adding petrol to GST might alter the amount they pay at the pump. If it's for companies, then it might reduce their costs and simplify transportation. We have no idea if this will happen later or years down the road, but one thing is for sure: GST on petrol would transform India's taxation system and fuel efficiency.

FAQs

1. Is there GST on petrol in India?
No. Petrol and diesel are not subject to GST. Instead, they are taxed through excise duty and state VAT.

2. Why isn’t petrol under GST?
Because state governments depend heavily on VAT revenue (~16–17 % of state tax income). They fear losing control over fuel pricing and flexibility.

3. What if petrol is brought under GST?
Uniform tax rates would simplify the tax system, enable ITC for businesses, and remove tax-on-tax. However, states may impose a compensation cess, keeping the effective tax rate comparable to or higher than now.

4. What is the current excise duty?
As of April 2025, central excise is ₹ 19.90 for petrol and ₹ 15.80 for diesel per litre.

5. Has anything changed recently?
On 7 April 2025, the government added ₹ 2/litre special excise duty to petrol and diesel; OMCs absorbed the rise—consumers didn’t see a price hike.

6. When could GST apply to petrol?
No clear timeline. The GST Council continues to discuss the idea, but states have not agreed to include petroleum under GST yet.
 

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