As global crude oil prices surge amid escalating tensions in the Middle East, the debate over bringing petrol and diesel under the Goods and Services Tax (GST) regime has resurfaced, with leading oil economist Kirit Parekh calling for urgent consideration of the move.
Parekh, a former member of the Planning Commission, told NDTV the ongoing geopolitical crisis makes it imperative for policymakers to revisit fuel taxation. He urged the Finance Minister to convene a meeting of the GST Council to deliberate on including petrol, diesel and other petroleum products within GST.
“The war in the Middle East has made it necessary to consider bringing petrol and diesel under GST,” Parekh told NDTV, adding that most states may not face significant revenue loss. For those that do, he suggested the Centre could design a compensation mechanism to offset losses over one to three years.
Rising Oil Prices Add Urgency
The renewed push for GST inclusion comes as crude prices have surged sharply. According to data from the Petroleum Planning and Analysis Cell under the Union Ministry of Petroleum and Natural Gas, the Indian crude basket has climbed to $120.84 per barrel, nearly 75% higher than levels seen in February.
With India importing over 85% of its crude oil requirements, the spike has significantly increased the country’s import bill and raised concerns about inflation.
The situation has been further aggravated by disruptions in key global supply routes, including tensions around the Strait of Hormuz, a critical artery for global oil trade.
Centre Cuts Excise, States Hold VAT
In response to rising prices, the Centre recently reduced excise duty on petrol and diesel to ease the burden on consumers and oil marketing companies. Petroleum Minister Hardeep Singh Puri said the government chose to absorb financial pressure rather than pass on the full impact to citizens.
ALSO READ: Middle East Crisis: Russia Offers To Increase Crude Oil Supply, LNG Supplies To India
However, state governments have not followed suit. Value-added tax (VAT) on fuel remains unchanged across most states, continuing to be a major revenue source.
In fiscal 2025, states collectively earned over Rs 3 lakh crore from VAT and sales tax on petroleum products, a critical component of their finances and welfare spending.
For instance, in Delhi, VAT accounts for around Rs 15.40 per litre of petrol (about 16% of the retail price) and Rs 12.83 per litre of diesel (around 14%).
Bringing petrol and diesel under GST could lead to uniform taxation across states, reducing price disparities and potentially lowering the overall tax burden on consumers. It could also ease pressure on oil marketing companies during periods of high global prices.
Inflation And Consumer Impact
Parekh warned that any increase in fuel prices by oil marketing companies could have a direct inflationary impact, increasing costs across sectors and putting additional pressure on household budgets.
He emphasised that bringing fuel under GST could help moderate price volatility and reduce the burden on consumers during periods of global uncertainty.
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