Why Petrol & Diesel Remain Outside GST in India: An Analysis as of Late 2025
As of September 20, 2025, the Goods and Services Tax (GST), introduced with the ambitious goal of a unified "One Nation, One Tax" system, remains incomplete. The two most prominent items on the list of exceptions are petrol and diesel. While the rest of India's economy has largely transitioned to this single, streamlined tax regime, the fuel that powers the nation's vehicles and industries continues to operate under a complex, multi-layered tax structure. The ongoing debate about bringing petroleum products under the GST has raged for years, yet the same fundamental economic and political reasons that held back the change in 2017 are still very much in play today.
This situation isn't a technical oversight; it's a deliberate and deeply strategic choice driven by the fiscal realities of both the central government and the individual states. The GST Council, the apex decision-making body, has had countless discussions on the matter, but a consensus remains elusive. The core of the issue boils down to a single, unmovable fact: taxes on petrol and diesel are a fiscal lifeline for the government, and no political entity, whether at the Centre or in the states, is willing to give up such a reliable and immense source of revenue.
The Current Tax Structure: A Jigsaw Puzzle of Levies
To understand why fuel is a fiscal goldmine, one must first look at the current tax structure. A litre of petrol or diesel is not a simple transaction. Its final price is a sum of multiple levies imposed by both the central and state governments.
At the very beginning, there is the base price of the crude oil, followed by the cost of refining and transportation. On top of this, the central government imposes an Excise Duty. This is a fixed tax, which is a significant component of the final price. In addition to this, there are various cesses and surcharges. The revenue from these central taxes is a massive contributor to the Union Budget, funding everything from defense spending and national highways to social welfare schemes and subsidies.
After the central taxes are added, the fuel enters the state where it is sold. The state government then imposes its own tax, known as Value Added Tax (VAT). Unlike the central excise duty, the VAT is a percentage-based tax on the final price, which means it fluctuates with the international price of crude oil. The VAT rates vary from one state to another, which is a primary reason for the differing fuel prices across India's borders. These state-level taxes are a cornerstone of state budgets, financing local infrastructure, healthcare, education, and other essential public services.
This dual-tax structure of excise duty and VAT is precisely what GST was designed to replace. For all other goods and services, these multiple taxes were subsumed into a single, transparent GST. For fuel, however, the old system has been meticulously preserved.
The Revenue Security Blanket for States
The most significant and unassailable reason for keeping petrol and diesel outside the GST framework is the immense revenue it generates for the states. State governments, whose budgets are always under pressure to meet the demands of a growing population, view fuel taxes as a reliable and predictable source of income. Unlike other taxes that can be impacted by economic fluctuations, fuel consumption remains relatively stable. Even during an economic slowdown, people still need to commute, and goods still need to be transported. This inelastic demand for fuel makes the tax a consistent and steady revenue stream.
The GST regime, while beneficial in many ways, has placed limitations on a state's ability to tax. By joining the GST system, states have had to give up their rights to impose various taxes, with the assurance that they will receive their share of the GST revenue. For a state to willingly surrender its power to tax a commodity as lucrative as fuel would be a major fiscal risk. The revenue from VAT on fuel is a substantial portion of a state’s total revenue, often accounting for 20-30% or more of the state's own tax revenue. Giving up this lifeline would create a massive hole in their budget, and without a guaranteed compensation mechanism, no state is ready to take that leap of faith. The fear is that the GST compensation for the loss of fuel tax revenue would not be enough or would be unreliable, plunging state finances into chaos.
The Political Impasse within the GST Council
The decision to include petrol and diesel under GST is not a matter for a single ministry or a unilateral decision by the central government. It requires a vote by the GST Council, a constitutional body composed of the Union Finance Minister and the finance ministers from all Indian states and Union Territories. For a significant policy change like this, a three-fourths majority of the votes is required. The central government holds one-third of the voting power, and the states collectively hold the remaining two-thirds.
This is where the political stalemate becomes most apparent. Regardless of which political party is in power at the state or central level, the underlying fiscal incentives remain the same. The states, whether governed by the ruling party or the opposition, have a unified and vested interest in protecting their revenue. No state wants to be the first to propose the change and risk the fiscal stability of its government. As such, every GST Council meeting where this topic is discussed has ended without a consensus. States have consistently argued that they cannot afford to lose the revenue without a robust and permanent compensation mechanism, something the central government has been unwilling to commit to. This political friction and the inherent conflict of interest mean that the agenda, despite being a subject of constant public debate, has been tabled and deferred for years on end.
The Impact on the Common Man and the Economy
From a consumer and economic perspective, the exclusion of petrol and diesel from GST is a major source of frustration. The cascading effect of the current tax structure is a primary concern. The high price of fuel directly translates to higher transportation costs for all goods, from food and vegetables to manufactured items and raw materials. These increased costs are passed on to the end consumer, contributing to inflation and making daily life more expensive.
If fuel were to be brought under GST, the tax would be levied on a single rate, and input tax credit would be available. For businesses, this would mean that the tax paid on fuel used for transportation could be claimed back, reducing their operational costs. This, in turn, could lead to a reduction in the price of goods and services, benefiting the economy as a whole. A single tax would also eliminate the price differences between states, which often leads to tax evasion as businesses and individuals look to refuel in states with lower VAT rates. This streamlining would create a level playing field for businesses and a more transparent pricing system for consumers.
The core argument for including fuel in GST is to harness these economic benefits. Lower fuel prices could stimulate demand, reduce inflationary pressures, and make Indian products more competitive on the global stage. However, this economic idealism is continually outweighed by the political and fiscal pragmatism of a system that is designed to protect its revenue.
The Technical Challenges and The Compensation Conundrum
Beyond the political will, there are also significant technical hurdles to overcome. One of the biggest questions is what the GST rate on fuel would be. If a high rate like the current highest slab of 28% is applied, it could still result in a final price higher than what some states are currently charging, defeating the purpose of reducing prices. On the other hand, if a lower rate is applied, the revenue loss for both the Centre and the states would be astronomical. The GST Council would need to find a Goldilocks-like rate that satisfies both the need for revenue and the demand for lower prices.
The most critical issue, however, remains the compensation model. Under the initial GST implementation, states were guaranteed compensation for any revenue shortfall for a period of five years. This guarantee has since expired, and states are now fending for themselves. A new, permanent, and ironclad compensation formula would need to be devised and agreed upon by all parties to make the inclusion of fuel under GST a viable option. Without a long-term plan for compensating states for their revenue loss, the current tax structure, no matter how inefficient, will continue to be seen as the safer bet.
What the Future Holds: A Stagnant Debate
As of September 20, 2025, the debate over bringing petrol and diesel under GST is no longer a question of "if" but "when," and the "when" seems increasingly distant. The central government has stated on multiple occasions that it is ready to discuss the issue, but it has always placed the onus on the states to agree to the proposal. The states, in turn, have consistently pushed back, citing the potential for massive fiscal instability.
Recent GST Council meetings have continued to show the same lack of consensus. Discussions have revolved around a potential framework for compensation and a staggered approach, but no concrete proposal has gained traction. The political and economic incentives remain fundamentally misaligned. While the public and industry continue to voice their support for the move, the political reality is that a change this drastic requires a level of trust and mutual agreement that has been hard to come by.
For now, and likely for the foreseeable future, the fuel that powers India will continue to be the exception to the "One Nation, One Tax" rule. It will remain a critical source of revenue, a subject of ongoing debate, and a symbol of the complex fiscal federalism that governs the Indian economy. The promise of a unified tax system will remain a work in progress until a solution is found that can balance the needs of the consumer with the fiscal realities of the governments that serve them
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