Crude under GST

Crude under GST – Easier said than done

There has been a wide ranged debate about including crude under GST. Unlike what people might think petroleum products don’t mean diesel and petrol only. It also includes natural gas, kerosene and aviation turbine fuel (ATF), among other things. Each of these products is not taxed at the same rate, either by the center or states. Petroleum products attract an excise duty which is a central tax, and also state specific taxes.

Subsuming fuels in GST is not as easy as it is politically being made out to be. The problem is that the effective sales tax on fuel varies wildly from state to state.  For instance, Maharashtra charges 40% on petrol while Andaman and Nicobar charges just 6% ad valorem. The effective sales tax on diesel ranges from 6% to 29%. The Centre charges a fixed amount of Rs 19.48/lt of petrol and Rs 15.33/lt diesel across the country.

The total state levies put together are 50-60% of fuel price & If the central levy and dealers commission is added, the amount goes up to nearly 100% over the real cost of fuel. Now, if petroleum is included in GST, then the Revenue Neutral Rate (RNR) could be as high as 100%. Such a high GST on fuel will not be acceptable pan India. Because once subsumed in GST, fuel will cost the same across the country. Also, with different rates in different states one median rate would mean some states lose out on revenue (which is also a major part of the state budget) while states with lower taxes will see increase in fuel prices. Both may be unacceptable by the state government. With the GST Council consisting of finance ministers of different states, coming to a consensus will be difficult.

Given the above complexities it may be difficult to implement GST on petroleum products at one go. The GST Council could look at implementing it in a phased manner. Firstly it could replace Central Excise Duty which is mostly fixed, by GST at the initial phase and include state tax in the next phase. Alternatively products like natural gas and ATF can be brought under GST first followed by petrol and diesel. Most of the states tax natural gas at the same rate, so the variation in rates will be minimal.

Technically there is no link between the international prices of crude and the need for GST on petroleum products. One is a commercial issue; the other is a tax policy issue. But, due to whatever reasons they are being combined currently. Thus even if crude prices were to go up further, it is unlikely, petroleum products will come under GST immediately. Both the states & the center will have to work out a way to reduce current taxes.


Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

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