More Stories

Informist, Monday, Apr. 6, 2026

 

--Govt source: Nudged states to cut petrol, diesel VAT if retail prices rise

--Govt source:States to decide on petrol, diesel VAT cut based on fisc space

--Govt source:Time may be apt for poll—bound states to cut petrol, diesel VAT

 

By Priyasmita Dutta

 

NEW DELHI – After reducing the excise duty on petrol and diesel by INR 10 per litre last month, the Centre has likely nudged states to consider lowering the value-added tax on petrol and diesel to ensure retail prices remain unchanged in case global crude oil prices soar further, a senior finance ministry official said. "VAT forms a significant portion of retail prices, especially because it is ad valorem....a reduction in VAT will ensure retail prices stay where they are," the official told Informist. "Centre cannot dictate, it can only nudge or suggest (states)," the official added, noting that a cut in VAT will dent states' revenues.

 

Petrol, diesel, natural gas and aviation turbine fuel are not yet taxed under the goods and services tax and are subject to VAT and central excise duty. Fuel prices vary from state to state, depending on the VAT rate levied by the respective state. Despite the steep rise in oil prices amid the ongoing US-Iran war, retail prices of petrol and diesel in India have not changed, despite these fuel prices increasing globally. 

The Centre on Mar. 27 had cut excise duty on petrol to INR 3 per litre from INR 13 per litre, and that on diesel to zero from INR 10 per litre to help oil marketing companies absorb the impact of the nearly 51% rise in Brent crude oil prices to nearly $110 a barrel since the war broke out in Iran on Feb. 28. Oil prices had soared after Israel and the US launched joint military strikes on Iran, prompting Tehran to hit back at Israel and US military installations in the Persian Gulf. Iran also shut the Strait of Hormuz, a narrow waterway that connects the Persian Gulf to the Arabian Sea and the Indian Ocean, resulting in a sharp rise in crude oil and natural gas prices.  

 

The government has also levied an export duty of INR 21.50 per litre on diesel and INR 29.50 per litre on aviation turbine fuel to ensure adequate domestic availability of the fuels. These duty changes will be reviewed by the Centre every fortnight. The Centre is likely to incur a revenue loss of INR 70 billion on a fortnightly basis due to the recent cut in excise duty on petrol and diesel, the government had said. 

 

The recent cut in excise duty on petrol and diesel limits the scope for any further excise duty cuts by the Centre in case global oil prices continue to surge. If that happens, oil marketing companies will have no option but to pass on the increased prices to customers, leaving only the option of a cut in VAT to prevent a steep jump in retail prices. However, this could mean states could incur some losses if they decide to cut VAT on these fuels. "States will have to take a call after analysing their finances and priorities," the official said.

 

State Bank of India Group Chief Economic Adviser Soumya Kanti Ghosh said states earned a total of INR 3.02 trillion from sales tax and VAT on petroleum, oil, and lubricant products in 2024-25 (Apr-Mar), and with an increase in crude prices, states are likely to earn higher VAT revenue if this tax levy remains unchanged. 

 

"Even if we consider the oil consumption by states of FY26 (estimated from FY25 share) and the new excise duty rates of the Centre, states are expected to earn higher VAT by INR 250 billion, benefiting from the higher crude oil price, with Karnataka benefiting the most," Ghosh said in a report. "Thus, states can act to cut VAT rates and pass on the benefit to consumers!"

 

Illustratively, Karnataka imposes 29.84% sales tax or VAT on petrol and 21.17% on diesel. Petrol prices in Bangalore have been at INR 102.92 since the war broke out, although on Mar. 30 and Mar. 31, it had gone up a bit to INR 102.96 per litre. 

 

The finance ministry official also said the upcoming Assembly elections may also be an opportune time for states to cut VAT on petrol and diesel. "It may benefit them in terms of optics," the official said. Four states --Assam, Kerala, Tamil Nadu, West Bengal— along with the Union Territory of Puducherry will go to polls this month. Votes will be counted May 4.

 

In the past, the Centre and states had cut excise duty and VAT on petrol and diesel to both cushion oil marketing companies and lower pump prices, depending on the economic situation. In several such instances, a few states followed suit and cut VAT. For instance, in November 2021, the Centre had cut excise duty on petrol and diesel on the eve of Diwali by INR 5 per litre and INR 10 per litre, respectively. Following this, 25 states and Union Territories undertook commensurate reduction of VAT to give relief to consumers. The Centre had again cut excise duty on the fuels in May 2022, which had prompted states that had not cut VAT in November to lower their taxes. 

 

This year, however, no state has so far announced a cut in VAT on petrol and diesel after the Centre's latest round of excise duty cuts, prompting it to nudge states to do so.  End

 

US$1 = INR 93.06

 

Edited by Tanima Banerjee

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd. by NSE Data & Analytics Ltd., a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt. Ltd.

 

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2026. All rights reserved.