Summary: Petroleum products remain outside the GST framework despite the broader “One Nation, One Tax” architecture. Petrol, diesel, natural gas, crude oil and aviation turbine fuel (ATF) are kept outside GST under Section 9(2) of the CGST Act, with their inclusion requiring a date to be recommended by the GST Council under Article 279A(5) of the Constitution. The article explains that revenue considerations are a major factor, particularly because petroleum taxation provides a stable source of revenue to both the Centre and States. It also highlights the federal dimension, as States currently retain flexibility over petroleum VAT. A further technical consequence is the absence of GST input tax credit on petroleum inputs, creating cascading costs for downstream sectors. The continued exclusion therefore reflects a negotiated fiscal and federal compromise, pending political and fiscal consensus on bringing petroleum products within GST.
At any fuel station across India a customer paying for petrol is quietly paying two different kinds of tax layered one on top of the other — Central Excise Duty and State VAT — while the traders selling almost anything else, pay a single, unified GST. This is not an oversight. Nearly nine years after GST subsumed a tangle of central and state levies into one tax, five petroleum products — petrol, diesel, natural gas, crude oil, and aviation turbine fuel (ATF) — remain deliberately parked outside it under Section 9(2) of the CGST Act, which keeps them out “until a date notified by the Government on the recommendation of the Council.” That “until” has never arrived, and understanding why tells us something about how fiscal federalism actually works in India.
The first reason is revenue. Petroleum is not an ordinary commodity for government finances — it is one of the most reliable, inelastic sources of tax collection any government has. Demand for fuel barely dips even when prices rise, which makes it an unusually stable base to tax. States, in particular, lean heavily on VAT from petroleum to fund everything from salaries to infrastructure, and for a Union Territory like Jammu & Kashmir, where the revenue base is already narrower than in larger, more industrialised states, this dependence is sharper still. Bringing petroleum under GST, with its capped rate structure (a ceiling of 40% under the current four slab regime), would mean surrendering the freedom to tax fuel at whatever combined rate — often 40-50% or more when excise and VAT are added together — a government judges necessary in a given year.
The second reason is federal trust, or the lack of full trust, in a single, immovable rate. GST works on the principle of a Council-recommended, largely uniform rate across states. Petroleum taxation, by contrast, has historically been a lever states use independently — to respond to local fiscal stress, subsidise farmers through diesel relief, or manage populist pressure during price spikes. Pooling that lever into GST would mean every state losing an instrument it currently controls unilaterally, and reaching consensus in the GST Council, which requires broad agreement, has simply not been possible on this point.
There is also a technical dimension. Petroleum products sit at the base of enormous downstream ITC chains — transport, manufacturing, and logistics all consume fuel as an input. Keeping petroleum outside GST currently blocks that ITC entirely, since no GST is paid on the input to begin with (Section 17 read with the current exclusion). Bringing it in would, in principle, allow ITC flow and reduce embedded cascading costs across the economy — an argument made repeatedly by industry — but this same benefit is precisely what makes states cautious, since ITC flow would also reduce net effective revenue collected.
Article 279A(5) of the Constitution already anticipates this eventual transition, empowering the Council to recommend a date. Until political and fiscal consensus catches up with constitutional design, petroleum remains the one visible seam in an otherwise “One Nation, One Tax” architecture — a reminder that GST’s uniformity was always a negotiated compromise, not an absolute.
Aijaz Hussain Malik, JKAS, State Taxes Officer, Circle-C, Srinagar writes about GST Compliance.
