4 Years of GST: Reasons Why Petroleum Products are still controlled by State

4 Years of GST - Petroleum Products - Taxscan

The petroleum products such as crude oil, natural gas, diesel, petrol, and aviation fuel are outside the ambit of GST and they are subject to the levy of Central excise and State specific VAT regulations.

Since these petroleum products are still outside the GST net, there is a loss of input tax credits (ITC) that is paid towards excise and State VAT, as the same cannot be off-set towards output GST. Similarly, GST on capital goods and input services, becomes a cost for the petroleum industry.

Since the genesis of GST, the question which strikes our minds is, why are the Petroleum Products still controlled by the State and not made a part of GST?


  • Adverse Impact on Revenue

Bringing petroleum products under GST even within the highest slab of 28% would significantly dent the government’s treasure as the revenue dependency on current tax levies is high. In order to compensate for this gap, the government may also resort to introduction of additional cess on the petroleum products, which would mean that the ultimate price to the consumer may not see a substantial dip.

  • Opposition By State Government

Petroleum products contribute a significant amount of revenue to the states. For instance, VAT on petroleum products is as high as 40% in Maharashtra, contributing approx. Rs.25,000 crore annually. By being able to levy VAT on these products, the state governments have control over their revenues. Bringing petroleum under GST takes away that control as the Centre is the one in charge of fixing the rate of GST.

  • VAT rates differs widely amongst states

Yet another reason is that the rate of VAT on petrol and diesel varies wildly amongst states. For instance, Maharashtra charges up to 40% on petrol, while Andaman and Nicobar charge just 6%. If GST is implemented, then the prices will increase dramatically in Andaman and Nicobar, but on the other hand, they would fall in Maharashtra if the cumulative rate is lower than the current rate.

Consequently, the common person would end up paying more for petrol in Andaman and Nicobar, the Maharashtra government would lose out on revenue as GST would lower the effective rate of tax on petrol.

Petition In Kerala HC

Recently, a petition has been file in the Kerala High Court by the Kerala Pradesh Gandhi Darshanvedhi urged that petrol and diesel rates differ in various states as the tax levied by each state is different. It was contended by the petitioner that unification of the tax on petrol and diesel is required, and further pointed out that frequent price increases are adversely affecting the life of citizens as prices of common goods also increase with the increase in fuel price. The division bench comprising Chief Justice S Manikumar and Justice Shaji P.Chaly asked the government to take a decision on the representation raising the demand within six weeks after considering a petition.

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