Petroleum products under GST

Petroleum products under GST

Petrol, diesel, aviation turbine fuel (ATF), natural gas, and crude oil remain outside India's GST framework in FY 2026-27. Until the GST Council notifies a transition date under Section 9(2) of the CGST Act 2017, these five products attract central excise duty plus state VAT — a dual regime that breaks the input tax credit (ITC) chain, inflates costs across transport, aviation, power, and fertiliser, and creates a compliance maze for multi-state businesses. Here is exactly what that means for your tax liability, your books, and your transition planning.

Why petroleum products are still outside GST: the legal architecture

The constitutional basis sits in Article 279A(5) of the Constitution, read with Section 9(2) of the CGST Act 2017. These provisions empower the GST Council to recommend — by a three-fourths weighted majority — the date from which GST shall be levied on the five specified petroleum products: petroleum crude, high-speed diesel (HSD), motor spirit (petrol), natural gas, and ATF.

The operative phrase is "on the recommendation of the Council". The date is not automatic; it requires an active resolution. Since 2017, the Council has met over 55 times. The petroleum question has come up repeatedly, most visibly in 2021 when the Kerala High Court directed the Council to convene and decide. The Council met, acknowledged the question, and deferred — because no consensus exists on a rate or a compensation mechanism that protects state revenues.

The Union Budget 2026 signalled renewed intent to integrate at least some petroleum products, but the GST Council has not as of May 2026 issued a formal notification. The practical reality for FY 2026-27 is therefore unchanged: excise plus VAT, not GST.

The current tax structure on each product (FY 2026-27)

Understanding the layered tax structure is essential before you can calculate costs, price contracts, or prepare for the eventual transition.

Petrol (motor spirit)

The retail price of petrol in any city is built from several layers:

• Refinery transfer price (ex-refinery): approximately Rs. 55–60 per litre, depending on crude input cost and refinery margin
• Central excise duty (basic excise + Special Additional Excise Duty + Road and Infrastructure Cess + Agriculture and Infrastructure Development Cess + NCCD): approximately Rs. 19–21 per litre as notified under the annual Finance Act
• Freight and dealer margin: approximately Rs. 4–5 per litre
• State VAT and cess: ranges from ~17% to 33%+ ad valorem depending on the state, applied on a base that includes excise

In Delhi, state VAT on petrol is approximately 19.4%, applied on the price inclusive of excise, producing a retail price around Rs. 94–96 per litre. In Maharashtra, state VAT plus cess pushes the retail price above Rs. 104–106 per litre. The aggregate tax incidence — central plus state — is typically 45–55% of the pump price, depending on state.

Diesel (high-speed diesel / HSD)

• Central levies: approximately Rs. 15–17 per litre (basic excise + SAED + Road and Infrastructure Cess + NCCD)
• State VAT: ranges from ~12% (Andhra Pradesh, Goa at reduced rates) to 24–25% (Rajasthan, Maharashtra) of the dealer price including excise
• Aggregate tax incidence: typically 35–50% of pump price

Diesel is the workhorse fuel for freight, agriculture, power backup, and construction. Its tax incidence is lower than petrol partly by policy design (freight cost implications on the economy), but the non-creditable nature of this tax means it compounds into the final price of almost every physical good transported by road in India.

Aviation turbine fuel (ATF)

ATF is unique because state VAT variations are the sharpest of all petroleum products:

• Central excise on ATF: approximately 11% ad valorem
• State VAT: ranges from 1–4% in states such as Andhra Pradesh, Telangana, and Manipur (which deliberately reduced VAT to attract airline operations) to 25–29% in states that have not rationalised

The practical result: an airline fuelling in Hyderabad pays dramatically less state VAT than the same aircraft fuelling in a high-VAT state. This creates genuine operational decisions about where to carry surplus fuel.

Natural gas

• Central excise: approximately 14% ad valorem (as notified; specific rates apply to different grades)
• State VAT: ranges from 3–5% for piped natural gas to domestic consumers to 15%+ for industrial supply in certain states
• The GST exemption on domestic PNG has created a patchwork; the same commodity faces wildly different effective rates depending on end-use classification

Natural gas is the feedstock for urea and other nitrogenous fertilisers, the fuel for gas-based power plants, and the distribution medium for city gas distribution (CGD) networks. Every percentage point of unrecoverable VAT on natural gas directly inflates fertiliser cost, electricity tariff, and CNG pump prices.

Crude oil

Crude oil attracts the Oil Industry Development Act (OIDA) cess (a specific duty), plus central excise at the refinery stage on specific petroleum products derived from it. The downstream excise treatment differs by derivative product. For most businesses, crude oil is not a direct purchase; the impact flows through the refined product prices above.

Worked example: the real cost of ITC denial for a logistics company

This is not an abstract regulatory problem. Here is what the current regime costs a mid-size logistics operator.

Assumptions:

• Company: Road freight operator, 30 trucks, pan-India routes
• Average monthly diesel consumption: 5,000 litres per truck
• Total monthly consumption: 1,50,000 litres
• Diesel retail price: Rs. 88 per litre (representative; will vary by state and city)
• Embedded taxes (central excise + state VAT + cess): Rs. 30 per litre (approximately 34% of pump price)

Monthly tax locked in as cost: 1,50,000 litres × Rs. 30 = Rs. 45,00,000 per month

Annual tax locked in as cost: Rs. 45,00,000 × 12 = Rs. 5,40,00,000 (Rs. 5.40 crore per year)

None of this is recoverable as ITC. It is a pure cost, embedded into freight rates charged to customers, who in turn embed it into the prices of goods they transport.

The GST counterfactual: If diesel were included in GST at a notional rate of 28% on the ex-tax base price of approximately Rs. 58 per litre, the GST per litre would be approximately Rs. 16.24. The logistics company, being a registered supplier of transportation services (taxable at 12% under RCM or 5% as applicable), would be entitled to ITC of Rs. 16.24 per litre. Over 12 months: 1,50,000 × 12 × Rs. 16.24 = Rs. 2.92 crore in ITC per year — credits that would directly reduce GST payable on freight invoices. Even if final rates are lower, the directional benefit is clear.

For a fertiliser plant consuming natural gas:

Assume monthly natural gas purchase of 80,000 MMBTU at Rs. 40 per MMBTU, with state VAT at 10%.

• Monthly VAT cost: 80,000 × Rs. 40 × 10% = Rs. 3,20,000
• Annual: Rs. 38,40,000 (Rs. 38.4 lakh) — locked in as cost

Under GST, this would be ITC against GST payable on fertiliser sales, directly supporting lower fertiliser manufacturing cost.

State VAT variations: why your fuelling location is a tax decision

For multi-state operators — particularly airlines, interstate truckers, and CGD distributors — the state where you purchase fuel is a genuine tax decision, not just a logistics one.

ATF: the starkest case

A budget carrier operating Delhi–Hyderabad–Mumbai triangular routes faces:

• Hyderabad (Telangana): state VAT on ATF ~1%
• Delhi: state VAT on ATF ~25% (approximate)
• Mumbai (Maharashtra): state VAT on ATF ~25%

An aircraft can legally carry uplift fuel from a low-VAT state to avoid refuelling at a high-VAT station. Airlines routinely model this and brief their operations teams accordingly. The catch: uplifting excess fuel adds to aircraft weight and burns more fuel in transit, so there is an optimisation calculation. The rule of thumb is that VAT differentials above approximately 10 percentage points justify technical stops for fuelling, depending on sector length and aircraft type.

Diesel: state-by-state compliance for interstate truckers

A logistics company with truck routes through Rajasthan, Maharashtra, and Karnataka faces three different VAT rates on diesel. The VAT paid is not recoverable but must be correctly booked under the state of purchase — not the state of registration of the company. Incorrect state-wise expense allocation distorts route profitability calculations and can trigger scrutiny from state tax authorities during VAT assessments.

Practical action: Build and maintain a live state-wise fuel VAT matrix. Update it whenever any state government issues a notification amending VAT rates. Subscribe to state gazette notifications (most states now publish these on their commercial tax department websites) or use a compliance tracking tool. Rate changes can occur at any time — not just at the annual budget.

ATF and natural gas: the case for early inclusion under GST

Within the political constraints on petroleum GST, ATF and natural gas are the two products most likely to move first, and both the government's policy signals and industry advocacy point in the same direction.

Why ATF makes sense as a first mover

• Airlines operate interstate and internationally; the fragmented state VAT structure creates genuine pricing distortions and fuelling inefficiencies
• Bringing ATF under GST at a uniform rate would let airlines claim ITC on fuel — the single largest operating cost at 30–40% of airline expense
• The central government already collects the principal excise; moving to IGST on ATF for interstate operations is administratively simpler than for liquid fuels sold at retail pumps
• States that have already reduced ATF VAT to near-zero have implicitly accepted that revenue from ATF VAT is less important than airline traffic generation

Why natural gas is the strongest economic case

• Natural gas feeds three strategically critical sectors: fertiliser (food security), power generation (energy access), and city gas distribution (clean cooking fuel)
• The fertiliser sector directly affects the cost of urea and complex fertilisers, which in turn affects farm input costs — a politically sensitive chain
• CGD operators supply both PNG (piped natural gas to households) and CNG (compressed natural gas for vehicles). Both compete with petrol and diesel. Bringing natural gas under GST while petrol and diesel remain outside creates structural distortions in the energy transition
• Multiple GST Council committees have recommended natural gas as the first petroleum product to transition; the 2024 Interim Budget discussion papers referenced it explicitly

What "early inclusion" would mean practically

If the GST Council resolves to include ATF and/or natural gas in, say, H2 of FY 2026-27, businesses in those sectors must be ready to:

1. Re-register supply chain contracts to reflect GST instead of excise/VAT billing
2. Update ERP systems to handle GST transaction types for these previously excluded inputs
3. Reconfigure ITC eligibility mapping so that ATF or gas purchases flow correctly into GSTR-2B reconciliation
4. Renegotiate fuel supply agreements where price formulas reference "excise plus VAT" as fixed components

Common mistakes businesses make in the current regime

These errors come up repeatedly in practice — and some have significant financial consequences.

1. Claiming ITC on petroleum purchased outside GST The most fundamental error. A transporter books diesel as a GST-taxable purchase and claims ITC — it will be rejected in GSTR-2B matching and can attract recovery plus interest at 18% per annum. Diesel, petrol, ATF, and natural gas carry excise and VAT invoices, not GST tax invoices. They cannot generate ITC. Book them as direct expense.

2. Misclassifying natural gas supply as exempt from GST Natural gas is outside GST (so no GST ITC), but businesses supplying products using natural gas as input may be making GST-taxable supplies. The confusion arises when finance teams mark natural gas purchases as "GST exempt input" in their ERP and inadvertently apply Rule 42/43 proportionate reversal calculations to unrelated exempt supplies. This distorts ITC reversal calculations for the business.

3. Ignoring state VAT rate changes mid-year State governments change VAT rates on petroleum without advance notice. A logistics company that fixes fuel cost assumptions for the year at April rates may be working with incorrect margins by October if two or three states have issued mid-year VAT notifications. The financial impact on route profitability can be material.

4. Incorrect export drawback claims involving petroleum Exporters who use petroleum-based fuels in manufacturing or who move goods by fuel-intensive methods can potentially claim drawback under the Customs Act 1962. Errors arise when companies claim drawback at All Industry Rate (AIR) without verifying that the AIR for their export product category already factors in fuel costs — double-claiming is an audit flag.

5. Failing to segregate pre-GST transition stocks (relevant at inclusion date) When the GST Council does eventually bring petroleum products into GST, businesses holding pre-transition stocks on which excise and VAT have been paid will need to claim transition credit. In 2017, the transition credit mechanism under Section 140 of the CGST Act had strict conditions: stocks had to be identified, valued, and filed within the prescribed window. Businesses that did not maintain excise-duty-paid stock registers could not claim credit. The lesson: maintain excise and VAT-paid stock registers for petroleum products now, before you know the transition date. Reconstructing these records retrospectively is far harder.

Transition planning: steps to take before the GST Council acts

You do not know when inclusion will happen. You do know that it will happen. Here is a practical preparedness sequence for businesses significantly exposed to ATF or natural gas.

Step 1: Run the scenario analysis now For each of your petroleum-intensive cost centres, model two scenarios: (a) GST at 12% on the product, (b) GST at 18%. Calculate the net ITC benefit against the likely change in base price after tax restructuring. This gives you the pricing adjustment range you will need.

Step 2: Audit your supplier agreements Fuel supply contracts typically reference "price including all taxes" or "price plus applicable taxes". When the tax changes from excise/VAT to GST, the "all-in" formula may produce a windfall or a shortfall for one party. Flag these clauses for renegotiation at inclusion.

Step 3: Map your ITC chain forward Identify which of your GST-taxable output supplies will absorb the new ITC. A power generator selling to a distribution company under a long-term PPA may not easily pass through a sudden cost reduction; the PPA tariff structure matters. Work this out in advance.

Step 4: Configure ERP in sandbox mode Ask your ERP or accounting system vendor to set up a sandbox environment in which ATF or natural gas is treated as a GST input. Test procurement workflows, ITC calculation, GSTR-2B reconciliation, and monthly return preparation. When the transition notification arrives, you will have days or weeks to go live — not months.

Step 5: Train your AP and tax teams Accounts payable teams that have never processed a GST invoice for fuel will need specific training. The tax invoice format, HSN code requirements (HSN codes for petroleum products will be notified as part of the transition), and e-invoice thresholds will all apply.

Step 6: Monitor the GST Council agenda The Council agenda is published in advance of each meeting on the GST Council's official portal (gstcouncil.gov.in). When petroleum products appear on the agenda with a "recommendation" item (as opposed to a "discussion" item), that is the signal to accelerate internal preparation.

The revenue politics: why state governments resist

Understanding the political constraint makes you a better predictor of timing. State VAT on petrol and diesel is among the top two or three revenue sources for most state governments — alongside stamp duty and state excise on liquor. In FY 2024-25, aggregate state VAT revenues from petroleum products were estimated at over Rs. 2.5–3 lakh crore across all states combined.

The 2017 GST transition used a compensation mechanism: states were guaranteed 14% annual growth in their GST revenues for five years, with the shortfall funded by the GST Compensation Cess. That cess has since lapsed (June 2022), and disputes over compensation arrears remain unresolved with some states. In this context, asking states to again surrender a major revenue source — without a robust, long-term compensation formula — is politically difficult, regardless of the macroeconomic logic.

The most realistic transition scenario, as discussed in policy circles, is a phased approach: natural gas first (smallest state revenue sacrifice, largest economic benefit), ATF second (interstate character makes state revenue thin anyway at rationalised rates), and liquid fuels (petrol, diesel) only when a state-revenue-neutral formula is agreed — which may take several more years.

Key takeaways

• Petrol, diesel, ATF, natural gas, and crude oil remain outside GST in FY 2026-27 under Section 9(2) of the CGST Act; no transition date has been notified as of May 2026.
• ITC on petroleum fuel purchases is not available under any circumstance in the current regime; booking such purchases as recoverable input tax is an error that attracts interest at 18% per annum and potential penalties.
• The real cost to a 30-truck logistics fleet is approximately Rs. 5+ crore per year in non-recoverable tax locked into diesel purchases — a number that scales linearly with fleet size and route mix.
• State VAT variations on ATF (1% to 29%) make fuelling-station selection a genuine tax decision for airlines; multi-state operators must maintain a live state-wise VAT matrix and update it continuously.
• Natural gas and ATF are the most likely first movers into GST; businesses in fertiliser, power, CGD, and aviation should run GST-inclusion scenario analyses now and identify contract clauses that need renegotiation at the transition date.
• Maintain excise and VAT-paid stock registers for petroleum now — the 2017 transition taught us that retrospective reconstruction of pre-transition stock records is the biggest operational failure at inclusion date.
• Watch the GST Council agenda at gstcouncil.gov.in — when petroleum appears as a "recommendation" item, begin your ERP sandbox configuration, supplier notification, and AP team training immediately; transition windows will be short.