Fuel to the Fire: Why Petrol and Diesel Prices are Still Excluded from GST
GST on petrol and diesel has been a hot topic throughout all of India during the past years. Consumers crave reduced prices, but governments are faced with a fiscal jigsaw puzzle. Although there were the recent changes in GST 2.0 lowering many of the daily necessities and vehicles, petrol and diesel still remain excluded from the Goods and Services Tax (GST) framework until the most recent changes in September 2025.
So what's the actual tale of exclusion here, and why should it matter to your wallet? Let's just describe it in plain language.
The State of Affairs Today: The 'Tax-on-Tax
Today, what you pay at the pump is a multi-layered cake of taxes—and that's why petrol is so pricey:
- Base Price: True price of refined crude oil with transportation and refining.
- Central Excise Duty: It is imposed by the Central Government.
- State VAT (Value Added Tax): This is a tax imposed through your State Government.
- Dealer Commission: The margin for the petrol pump owner.
The problem? The big benefit of GST—Input Tax Credit (ITC)—isn't there here. Firms (like transportation and logistics) do not receive credit against the excise duty and VAT they pay on petroleum products. It's a 'tax on tax', making their costs of doing business go higher, which gets passed on to you, making all your expenses more costly.
The Big Question: Why Have They Not Been Added?
This is the decision of the GST Council, which is comprised of Union Finance Minister and Finance Ministers of all the Union and State Governments. The Central Government has been willing but the States have always put on the brakes.
All the opposition boils down to a single determining aspect: Revenue.
1. The States' Lifeline: Vast Revenue Loss
Financial Linkages: Petrol and diesel levies (VAT) are among the largest and regular contributors of 'own tax revenue' of state governments. For some of the states, it adds a significant value to their tax pot.
Fear of Budget Cuts: If petrol falls within GST, revenues will go to the Center, with the current maximum GST rate slab (28% for a potential rate in petrol) being significantly lower than the aggregated levies currently levied by some states. States are frightened that the sudden and astronomical loss of revenues would leave their treasuries incapable of funding their welfare policies, infrastructural growth, and other core projects.
2. Loss of Flexibility (The 'Lever' Argument)
Emergency Fund: The existing framework allows state governments the liberty of raising or lowering VAT rates overnight according to their revenue requirement or granting regional relief. Once in GST, the rate gets standard all over India and they lose the liberty of levying taxes unilaterally with their 'lever'. This is something they do not want to relinquish so easily.
The Prospective Impact: What Does GST on Petrol Imply?
In the case the GST Council imposes the regime on petrol and diesel and the top slab of 28% is levied, then the research of the industry and previous research implies:
| Particular | Current Scenario (Example) | Potential Under 28% GST |
|---|---|---|
| Retail Price | HIGH & VARY BY STATE | Significantly Lower |
| Tax System | Multistage (Excise + VAT + Cess) | Similar Throughout |
| Input Tax Credit (ITC) | Not Applicable | Applicable to |
Exporter en planches
The gain is dual:
Cheaper Petrol: Even with the apex 28% GST rate, the final price at the pump station would come down in a majority of the states with the eradication of exorbitant central and state taxes. Cheaper Goods & Services: Access to ITC of transport, manufacturing, and logistics firms would decrease their costs of operation. This reduction could then be passed on to the consumer, making cheaper goods and services available in the economy, thereby reducing general inflation.
Last Update: 2025 Pending Agreement
Although the last GST 2.0 reform changes (which take effect from September 2025) centered on reducing existing tax slabs and making products such as automobiles and daily needs more affordable, petrol and diesel were excluded on purpose.
Finance Minister Nirmala Sitharaman has again kept the Central Government legally prepared, but the step needs unanimous agreement from the state governments within the GST council. Until the state governments agree on a working revenue-sharing and compensation model protecting their treasuries, the petrol or diesel you consume is going to continue to attract the old, pricey structure of tax.
The decision? Keeping fuel out of GST is the final big piece of the puzzle of tax reform. It's a tricky move that holds out enormous economic gains but involves a big political compromise over revenues. Until then, the consumer still bears the brunt of this significant policy delay.
