War Impact On Crude Oil Raises GST Question. Why It’s Easier Said Than Done

New Delhi:

The war in the Middle East and Iran’s blockade of the Strait of Hormuz have sent global oil prices soaring. While the Centre has reduced its excise duty on petrol and diesel, state governments have not slashed their VAT/sales tax share. This has prompted a question: should fuel be brought under the GST regime for uniform taxation? This is a question loaded with federalism concerns, and any such move will trigger a face-off between the Centre and states.

The Cost Of War

According to data from the Petroleum Planning and Analysis Cell under the Union Ministry of Petroleum and Natural Gas, the cost per barrel of Crude Oil (Indian Basket) is now $120.84. This is 75 per cent more than the cost per barrel in February.

India imports more than 85 per cent of its crude oil requirements, and the massive hike in crude oil prices has significantly raised the government’s import bills.

To reduce the pressure on state-run fuel companies, the Centre reduced the excise duty on petrol and diesel last week.

“The Modi Government had two choices- either increase prices drastically for citizens of Bharat as all other nations have done or bear the brunt on its finances so that Indian citizen is insulated from international volatility.

Hon’ble Prime Minister @narendramodi Ji, in keeping with his Government’s commitment of last 4 years since the conflict in Russia-Ukraine started, decided to take a hit on its own finances again to safeguard the Indian citizen,” Petroleum Minister Hardeep Singh Puri said in a post on X.

Source: Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas

How States Responded

While the Centre reduced excise duty on petrol and diesel, states did not reduce their VAT/Sales tax on petroleum products. Union Civil Aviation Minister Ram Mohan Naidu appealed to states to reduce VAT on aviation turbine fuel, but no state has made such a move yet.

The VAT/sales tax on petroleum products is a massive source of revenue for states and Union Territories. In the 2024-25 financial year, states collected a total of over Rs 3 lakh crore in VAT/sales tax on petroleum products.

This revenue is critical to states’ economies and for their investment in public welfare activities, explaining why none of them has followed the Centre into slashing the VAT/sales tax on petroleum products.

For example, the petrol price in Delhi, as on April 1, is Rs 94.77 per litre. Out of this, the state government collects Rs 15.40 as VAT — 16 per cent of the price per litre.

As for diesel, the rate in Delhi is Rs 87.67 per litre. The state government collected Rs 12.83 per litre in VAT — 14 per cent of the price per litre.

The GST Question, And The Roadblocks

A big question is whether petrol/diesel prices must be brought under the GST regime to ensure uniform taxation. But this is easier said than done and is bound to draw stiff resistance from state governments.

Constitutionally, Article 279A(5) allows GST on petroleum products, but states that this will apply only on the recommendation of the GST council, comprising the Centre and the states.

Bringing fuel under the GST will have a huge impact on states’ finances and draw opposition from states, especially those ruled by opposition parties, who would project this as an attack on federalism. It would also be a step towards centralisation and reduce the flexibility states currently exercise to boost revenues during unforeseen emergencies such as the Covid-19 pandemic.

Among the positives is the argument that bringing fuel under the GST would prevent the state-wise distortion in fuel prices, which now vary across cities.

Kirit Parikh, who played a key role in the deregulation of fuel prices, told NDTV, “Bringing petrol and diesel prices under GST is a better option and must be considered. If fuel prices are brought under GST, it will help reduce the rising economic burden on petroleum companies due to the war in the Middle East.”