GST on petrol and diesel

The taxation of petroleum products remains one of the most debated aspects of India's Goods and Services Tax (GST) regime since its implementation in 2017. Since the introduction of GST 2.0 reforms on 22 September 2025, the GST structure has seen considerable change, though petrol and diesel are still kept out of its ambit.

Currently, GST on petrol and diesel is not applicable as these essential fuels continue to be taxed under the traditional taxation system. This arrangement has created a unique situation where petroleum products face multiple taxation layers, including value-added tax (VAT), central excise duty, and other local levies. Let's learn more about it.

What is the GST rate on petrol and diesel?

At present, there is no applicable GST on petrol and diesel as these products remain outside the GST framework. The GST Council, which makes decisions regarding the inclusion of products and their tax rates, has not finalised any rate structure for these fuels yet.

While many petroleum-derived products already attract GST at different rates, primary fuels such as petrol and diesel continue to be taxed under the previous regime.

Some petroleum products that already attract GST include:

• Petroleum jelly: 18% (HSN 27129010)
• Petroleum gases in gaseous state: 18% (HSN 27112100)
• Petroleum gases in liquified form: 5% (HSN 27111900)
• LPG supplied to non-domestic exempted category customers: 5% (HSN 27111200)

The absence of GST on petrol taxation creates a complex price structure that varies significantly across different states in India.

GST on fuel and petroleum products

The taxation structure for petroleum products in India presents a mixed scenario. While crude oil, natural gas, GST on petrol and diesel, and ATF remain outside the GST regime, many petroleum-derived products are already taxed under GST at varying rates, primarily at 5% and 18% under the GST 2.0 framework, ranging from 5% to 18%.

Benefits of GST on petrol

• Price reduction: Even at the normal GST rate of 18% under the GST 2.0 system (the highest normal slab being now 18%, subject to a 40% demerit rate for luxury and sin items). Calculations suggest petrol priced at ₹96.86/litre under the current system might cost only ₹78.36/litre under GST on petrol.
• Uniform pricing: A standardised tax rate would eliminate price disparities across states, creating a single fuel price throughout the nation.
• Elimination of cascading taxes: The current system creates a tax-on-tax scenario, which GST would eliminate.
• Input tax credit (ITC) benefits: Businesses can claim ITC on fuel expenses, thereby reducing their operational costs.
• Simplified compliance: A unified tax structure would simplify tax compliance for businesses involved in the petroleum industry.

GST 2.0 Reforms (September 2025)

On 3 September 2025, the 56th GST Council meeting introduced historic GST reforms, tagged as "GST 2.0" or "Next-Generation GST Reforms," effective 22 September 2025. This is the most comprehensive transformation of the GST system since its 2017 inception.

Though petrol and diesel are still exempt from GST, the reforms introduced substantial changes to the tax structure as a whole:

Key Changes Under GST 2.0:

• Rate rationalisation: The GST structure has been simplified to essentially two principal slabs: 5% (merit rate) and 18% (standard rate), nil rate (0%), 3% for gold/silver, and a new 40% demerit rate for luxury and sin products.
• Removal of slabs: The 12% and 28% slabs have been mostly removed, with 90% of goods in the 28% slab shifted to 18%, and nearly 99% of goods in the 12% slab shifted to 5%.
• Effect on vehicles: Small cars (petrol/LPG/CNG ≤1200cc & ≤4000mm; diesel ≤1500cc & ≤4000mm) had GST lowered from 28% to 18%, and luxury cars above these values now attract 40% GST.
• Compensation cess removed: Cess on cars has been withdrawn as of 22 September 2025.
  In spite of these wide-ranging changes, the addition of petrol and diesel to the GST system is still pending, still needing ratification by a unanimous vote of states.

Also Read:How do you Cut Costs in a Regime of Rising fuel prices?

Government's plan on imposing GST on petrol

The inclusion of GST on petrol and diesel has been envisioned since the inception of GST, with provisions already made in the law. However, implementation faces significant challenges, primarily due to revenue implications for both central and state governments.

The central government has consistently expressed its intention to bring petroleum products under the GST on petrol and diesel framework. In June 2024, Finance Minister Nirmala Sitharaman reaffirmed this position during the 53rd GST Council meeting and emphasised that the decision ultimately rests with the states. The government had made provisions for including these fuels when GST was introduced in 2017.

Even after the GST 2.0 reforms in September 2025, petrol and diesel remain excluded from the GST framework, the government still faces several challenges in:

• Ensuring revenue neutrality for both the centre and the states.
• Addressing concerns about potential revenue losses.
• Building consensus among all states.
• Developing a transition plan that minimises economic disruption.

The finance ministry has indicated that such inclusion may occur once the government can return to pre-GST revenue levels and recover the losses incurred after the implementation of GST on petrol and diesel.

States not in support of including petrol under GST

Several states, including Maharashtra and Kerala, have expressed strong opposition to implementing GST on petrol. Other states, such as Madhya Pradesh and Rajasthan, have also expressed concerns, primarily due to potential revenue losses, as petroleum products constitute a significant portion of their tax collections.

Key reasons for state opposition include:

• Loss of fiscal autonomy to set their tax rates.
• Potential revenue shortfalls that might not be adequately compensated.
• Loss of ability to adjust rates based on local economic conditions.
• Concerns about GST compensation mechanisms and timeliness.

These apprehensions make achieving the required unanimous approval from all states a significant challenge for the GST Council.

Fuel under GST

If fuel comes under GST, the taxation landscape would undergo a fundamental transformation. The current complex structure with multiple taxes would be replaced by a single, uniform tax rate applicable nationwide.

A potential GST on petrol implementation might look like:

• Base price with freight: ₹57.35/litre
• Dealer commission: ₹3.87/litre
• Total value: ₹61.22/litre
• GST at 18% (standard rate under GST 2.0): ₹11.02/litre
• Final retail price: ₹72.24/litre

This calculation uses the 18% normal rate in GST 2.0 rather than the earlier talked-about rate of 28%, an even deeper discount from existing prices. This represents a substantial reduction from current prices. Additionally, the transportation of petroleum products would be subject to GST on petrol and diesel at rates ranging from 5% to 18%, depending on the specific service used.

Conclusion

The inclusion of GST on petrol and diesel remains a topic of ongoing discussion with significant implications for India's economy. Even after the extensive GST 2.0 reforms introduced in September 2025, which streamlined the tax system and rationalised rates in most industries, petrol and diesel are still kept out of the ambit of GST. While the benefits of standardisation, reduced prices, and simplified taxation are evident, the concerns about revenue implications for states present substantial challenges. The government continues to work towards building consensus while addressing legitimate concerns from various stakeholders.

The path forward for implementing GST on petrol and diesel will likely involve a careful balancing of economic benefits against fiscal concerns, requiring innovative solutions and compromise from all stakeholders involved.

For consumers looking to maximise savings on fuel purchases in the current taxation system, the Indian Oil Axis Bank Credit Card offers significant benefits on fuel transactions. This co-branded card offers cash back, surcharge waivers, and reward points that can help offset the high tax component of fuel prices.

Frequently Asked Questions

Why do states oppose GST on petrol?

States oppose GST on petrol due to potential revenue losses, reduced fiscal autonomy, and concerns over inadequate compensation mechanisms, as petroleum taxes form a significant part of their income.

Why is petrol price high in India?

Petrol prices in India are high primarily due to heavy taxation, including central excise and state VAT, which together can constitute nearly half of the retail price of petrol.

What if petrol comes under GST?

If petrol comes under GST, prices would likely become lower and uniform nationwide, benefiting consumers and businesses while simplifying taxation, though it may reduce revenue for states initially. Petrol under GST 2.0 would fall under the normal 18% rate and would lead to substantial price cuts.

What are the advantages of bringing petrol under GST?

Bringing petrol under GST ensures lower prices, uniform taxation, ITC for businesses, reduced logistics costs, simplified compliance, improved transparency, and elimination of tax cascading, boosting economic efficiency.

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Tax and GST regulations are subject to change. The information in this article is based on applicable laws, rules, notifications, and interpretations in force as on the date of publication and may change due to amendments, judicial decisions, or regulatory updates.