States ruled by the Bharatiya Janata Party (BJP) may lower value-added taxes (VAT) on transport fuel following the Centre’s excise duty cut, four people aware of the plans said.
An empowered group of secretaries on the Iran war discussed the need for VAT cuts to soften the blow from costly crude, and the Centre may shortly urge states to reduce the tax, the people said on condition of anonymity. The central government has already cut excise duty by ₹10 per litre on diesel to zero and that to ₹3 last month.
“State governments headed by the BJP may reduce VAT on transport fuels. Diesel is the primary product being considered for levy reduction given its impact across sectors,” said one of the four people mentioned above.
Wholesale price inflation of 8.3% in April, while retail inflation touched of 3.48%. A key culprit is diesel: At 94.7 million tonnes of annual consumption, it is the most-used petroleum product in India. Unlike petrol, which is used primarily for personal transport, costly diesel impacts a wide range of goods, given its wide use in transport, agriculture and industry.
2022 VAT cut
A revision in VAT essentially leads to a change in retail prices. If the BJP-ruled states indeed cut VAT, it would be a repeat of 2022, when Russia’s war in Ukraine pushed crude prices to new highs. The Centre then cut excise duty on fuel and urged states to follow with VAT cuts, and states ruled by the BJP complied. The BJP and its allies now rule 22 states and union territories, and a reduction in VAT, which ranges from 1% to 27% across India, could make a meaningful difference to fuel prices.
Gourav Vallabh, member of the Prime Minister’s Economic Advisory Council and BJP leader, said that since the Iran war began, crude oil prices have increased by more than 50%, while retail petrol and diesel prices are up only around 4%. “In this scenario, the Centre as well as the states together must lead the Indian economy to the next level without affecting the quality of life of common people. The Centre has sacrificed ₹10 in excise duty on petrol and diesel, and now it is the states’ turn as well, because together, we need to ensure that the quality of life of common citizens does not get affected. States should also do the needful without significantly affecting their exchequer,” he said.
Queries emailed to the union ministries of petroleum & natural gas and finance, prime minister’s office and cabinet secretariat, and the state governments of Bihar, UP, Rajasthan, Gujarat, Maharashtra, Assam, Chhattisgarh, Haryana, Madhya Pradesh, Uttarakhand, West Bengal and Delhi remained unanswered.
State hit
Even after the duty cut and the fuel price hike, oil marketing companies lose over ₹700 crore every day in selling fuel below cost, and another round of price hikes is expected. To be sure, Delhi and Maharashtra, both ruled by BJP, have already cut VAT on jet fuel.
Typically, a VAT cut spells bad news for state finances. Madhavi Arora, chief economist at Emkay Global Financial Services, said, “It will be a mild hit to their ‘own tax revenues’, given that states are already struggling to mobilize revenue amid high committed expenditure on salaries, pensions, interest payments and welfare schemes. However, any calibrated reduction in VAT on petrol and diesel could provide relief to consumers and help contain inflationary pressures.”
In FY25, states raised a total of ₹3.08 trillion by taxing petroleum products. Maharashtra topped the list with VAT collections of ₹36,992.2 crore, followed by Uttar Pradesh at ₹31,214.1 crore and Tamil Nadu at ₹24,861.3 crore, according to data from the Petroleum Planning & Analysis Cell.
“Any reduction in VAT would be a welcome relief for consumers. However, it is unlikely to negatively impact states’ VAT revenue. Since VAT is levied on an ad valorem basis (a percentage of the price), any increase in the base price automatically results in a higher absolute tax collection per litre,” a New Delhi-based fuel retailer said, referring to the recent increase in fuel prices.
‘No shortage’
BJP and NDA ruled Delhi, Uttar Pradesh, Maharashtra, Gujarat, Bihar, Assam and Odisha charge VAT at 16.75%, 17.08%, 21%, 14.9%, 16.37%, 22.19% and 24%, respectively. The states with the highest VAT on diesel in the country are Telangana (27%), Odisha (24%), Chhattisgarh (23%), Kerala (22.76%) and Andhra Pradesh (22.25%). The states with lowest VAT or sales tax is Andaman & Nicobar Islands (1%), Ladakh (6% MST) Arunachal Pradesh (7%), Mizoram (10%) and Tamil Nadu (11%). MST levied in some states and union territories including Ladakh, is the sales tax levied under Motor Spirit and Diesel Oil (Taxation of Sales) Act in line with VAT.
Congress party spokesperson Ranjeet Ranjan alleged that the government has failed in protecting the interests of farmers and common citizens. “If they are planning to ask states to reduce VAT, it means they are preparing the ground for another increase in petrol and diesel prices. As of now, retail fuel prices have already increased by around ₹3.90 per litre,” he said.
“The benefits of lower crude oil prices were never fully passed on to consumers, as the Centre continued to maintain high excise duties to shore up revenues,” said Ranjan, who is also a Rajya Sabha MP from Chhattisgarh.
The government has so far maintained that there is no shortage of crude oil, petrol and diesel in the country. On queries on reports of shortage of fuel at pumps and long queues of consumers, Sujata Sharma, joint secretary, ministry of petroleum and natural gas said that with the increase in prices of bulk or industrial diesel and petrol, there is a shift being witnessed by these bulk commercial buyers to retail pumps which has caused isolated instances of shortages. The official had earlier said that the government and OMCs do not appreciate the shift of bulk consumers to retail outlets.