GST on Petroleum Products: Constitutional Framework, Legislative Provisions and Judicial Perspectives

Introduction

The inclusion of petroleum products within the ambit of Goods and Services Tax (GST) has emerged as one of the most contentious and economically significant issues in India’s taxation landscape since the implementation of GST in July 2017. The current exclusion of petroleum crude, high-speed diesel, motor spirit (petrol), natural gas, and aviation turbine fuel from the GST regime represents a deliberate policy choice enshrined in both constitutional provisions and legislative frameworks. This exclusion has far-reaching implications for revenue distribution between the Centre and States, market harmonization, and consumer welfare.

The debate surrounding GST on petroleum products encompasses constitutional mandates, economic considerations, and judicial scrutiny. While Article 279A(5) of the Constitution provides the framework for potential inclusion, the GST Council’s reluctance to exercise this power has led to significant litigation and policy discussions. The matter gained particular prominence following the Kerala High Court’s intervention in Kerala Pradesh Gandhi Darshanvedhi v. Union of India [1], which challenged the GST Council’s decision to maintain the status quo.

Constitutional Framework for GST on Petroleum Products

Article 279A and the GST Council’s Authority

The constitutional foundation for GST on petroleum products is established through Article 279A of the Constitution of India, inserted by the Constitution (One Hundred and First Amendment) Act, 2016. Article 279A(5) specifically states: “The Goods and Services Tax Council shall recommend the date on which the goods and services tax be levied on petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel” [2].

This provision creates a unique constitutional arrangement where the GST Council, rather than individual governments, holds the exclusive authority to determine when petroleum products will be brought under the GST umbrella. The provision represents a departure from the general GST framework, where the Council’s role is primarily advisory, by conferring upon it the decisive power to trigger the taxation of these critical commodities.

The constitutional design also incorporates Article 279A(6), which mandates that the GST Council shall be “guided by the need for a harmonised structure of goods and services tax and for the development of a harmonised national market for goods and services.” This provision creates a tension between the goal of market harmonization and the current fragmented taxation system for petroleum products.

Federal Structure and Revenue Sharing Implications

The constitutional framework underlying GST on petroleum products reflects the complex federal structure of India’s taxation system. Under the current arrangement outside GST, states retain substantial autonomy in determining tax rates on petroleum products, which has resulted in significant price variations across states. The constitutional design envisages that bringing petroleum products under GST would fundamentally alter this federal dynamic by subjecting these products to the uniform GST rate structure.

The weighted voting mechanism under Article 279A(9) requires a three-fourths majority for GST Council decisions, with the Centre holding one-third weightage and states collectively holding two-thirds weightage. This structure ensures that any decision regarding petroleum products must have substantial state support, recognizing their significant revenue interests in these commodities.

Legislative Framework Under the CGST Act

Section 9(2) of the CGST Act 2017

The legislative framework for GST on petroleum products is primarily governed by Section 9(2) of the Central Goods and Services Tax Act, 2017, which states: “The central tax on the supply of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel shall be levied with effect from such date as may be notified by the Government on the recommendations of the Council” [3].

This provision creates a suspended animation effect, where the legal framework for taxing petroleum products under GST exists but remains dormant until activated by government notification based on GST Council recommendations. The provision demonstrates the legislature’s recognition that petroleum products require special treatment due to their economic significance and revenue implications.

The legislative structure also ensures that the transition to GST for petroleum products will be coordinated and systematic rather than automatic. This approach acknowledges the need for careful planning regarding rate structures, transition mechanisms, and revenue compensation arrangements before implementation.

Current Taxation Regime for Petroleum Products

Under the existing legislative framework, petroleum products remain subject to the pre-GST taxation regime. The Centre continues to levy excise duty on petroleum products, while states impose Value Added Tax (VAT) or sales tax. This dual taxation structure often results in a cumulative tax burden of 40-60% of the retail price of petroleum products.

The current regime creates several challenges including cascading effect of taxes, lack of input tax credit availability, and price disparities across states. For instance, petrol prices can vary by several rupees per litre between different states due to varying state tax policies.

Petroleum Products Currently Under GST

While the major petroleum products remain outside GST, several petroleum-related products have been brought under the GST framework. The GST law covers various petroleum derivatives and related products with different tax rates:

Petroleum gases in liquefied form attract 5% GST under HSN code 27111900, while petroleum gases in gaseous state are taxed at 18% under HSN code 27112100. Petroleum oils and oils obtained from bituminous minerals (other than crude) with 70% or more petroleum oils by weight are subject to 18% GST under HSN code 27109100.

Raw petroleum coke for anode making used in the aluminum industry attracts 18% GST under HSN code 27131110, provided it meets the specifications of Standard IS 17049. Liquefied petroleum gas (LPG) supplied to non-domestic exempted category customers by companies such as Indian Oil Corporation, Hindustan Petroleum, or Bharat Petroleum is taxed at 5% GST under HSN code 27111200.

Petroleum jelly falls under HSN codes 27129010 and 27129090 and attracts 18% GST. These inclusions demonstrate that the GST framework is technically capable of accommodating petroleum products, and the exclusion of major petroleum products is purely a policy decision rather than a technical limitation.

Economic Implications of GST on Petroleum Products

Revenue Considerations for Centre and States

The exclusion of petroleum products from GST has significant revenue implications for both the Centre and states. Currently, states derive substantial revenue from VAT on petroleum products, which directly accrues to state treasuries without sharing with the Centre. Data from the Petroleum Planning and Analysis Cell shows that state revenues from petroleum taxes increased by 46% from Rs 137,157 crore in 2014-15 to Rs 200,493 crore in 2019-20.

Bringing petroleum products under GST would fundamentally alter this revenue distribution. Under the GST framework, revenues are shared between the Centre and states based on predetermined formulas, which would result in states losing their exclusive control over petroleum tax revenues. This concern has been a primary factor in state resistance to including petroleum products in GST.

The Centre also benefits significantly from excise duties on petroleum products. The combined Centre and state taxes often constitute 50-60% of the retail price of petroleum products, making them crucial revenue sources for both levels of government.

Consumer Impact and Market Harmonization

The inclusion of petroleum products in GST would likely benefit consumers through reduced tax rates and elimination of cascading effects. Under the current GST structure, the maximum tax rate is 28%, which is significantly lower than the combined tax burden on petroleum products under the existing regime.

Market harmonization would be another significant benefit, as GST would eliminate the current price disparities across states. This would promote a truly national market for petroleum products and reduce distortions in transportation and logistics decisions.

The availability of input tax credit under GST would benefit businesses that use petroleum products as inputs, reducing their overall tax burden and improving competitiveness. This would be particularly beneficial for transportation companies, manufacturing units, and other petroleum-intensive industries.

Judicial Intervention: The Kerala High Court Cases

Kerala Pradesh Gandhi Darshanvedhi v. Union of India

The most significant judicial intervention regarding GST on petroleum products came through the case of Kerala Pradesh Gandhi Darshanvedhi v. Union of India before the Kerala High Court [1]. The petition, filed by Kerala Pradesh Gandhi Darshanvedhi, challenged the GST Council’s decision not to include petroleum products under GST.

The petitioner argued that different tax rates levied by state governments on petroleum products resulted in price disparities across the country, impeding the achievement of a harmonized national market as contemplated under Article 279A(6) of the Constitution. The petition also contended that the rise in petroleum product prices had a cascading effect on all commodities, including essential ones, leading to increased cost of living and affecting citizens who did not even directly consume petroleum products.

Court’s Direction and Government Response

The Division Bench comprising Chief Justice S. Manikumar and Justice Shaji P. Chaly initially directed the GST Council to take an appropriate decision on the representation within six weeks. However, the Court was not satisfied with the initial response from the GST Council, which cited the pandemic as a reason for not deliberating on the matter.

The Court observed: “We are not satisfied with the reasons. There should be some discussion and genuine reasons, as to why petroleum products cannot be brought under the GST regime. Further, pandemic period cannot be cited as a reason. It is well known that even during pandemic period, several decisions were taken involving revenue, after deliberations” [4].

Subsequently, the Centre and GST Council filed a counter-affidavit stating that it was “a conscious decision of the GST Council to keep petroleum products outside the GST regime at this stage” and that “these products yield significant revenue for both Centre and States” [5]. The authorities argued that the petition challenged the doctrine of separation of powers by seeking to enforce legislative and policy decisions through judicial intervention.

Constitutional and Legal Arguments

The petitioner raised several constitutional arguments, including violations of Articles 14 and 21 of the Constitution. It was argued that the non-inclusion of petroleum products under GST created arbitrary price differences across states, violating the principle of equality under Article 14. The petition also contended that increased petroleum prices affected the right to life under Article 21 by making essential goods more expensive.

The government countered these arguments by emphasizing that fiscal policy is a function of several factors and may cause hardship to taxpayers. The Centre argued that the government, in its wisdom and considering all relevant factors including the need for resource mobilization amid fiscal constraints, had taken the decision in public interest.

Policy Considerations and Future Prospects

Arguments for Inclusion

Several compelling arguments support the inclusion of petroleum products in GST. Market harmonization would eliminate the current price disparities across states, promoting genuine national market integration. The elimination of cascading effects would reduce the overall tax burden on businesses and consumers.

Input tax credit availability would significantly benefit petroleum-intensive industries, improving their cost structure and competitiveness. The simplified tax structure would reduce compliance costs and administrative burden for both taxpayers and tax authorities.

The inclusion would also align with the original vision of GST as a destination-based consumption tax covering all goods and services except a few specified exclusions.

Arguments Against Inclusion

The primary argument against inclusion relates to revenue implications. Both the Centre and states derive substantial revenues from petroleum taxes under the current regime, and the transition to GST would require careful consideration of revenue compensation mechanisms.

The unique nature of petroleum products as essential commodities with inelastic demand makes them attractive for revenue generation. The government has argued that petroleum products are strategic commodities requiring special treatment from a taxation perspective.

Implementation challenges, including the need to restructure existing tax systems and agreements with petroleum marketing companies, also present significant obstacles.

International Comparisons

The treatment of petroleum products varies across GST/VAT systems globally. Some countries include petroleum products in their GST/VAT systems with special provisions, while others maintain separate excise regimes. The choice often depends on the specific economic and fiscal circumstances of each country.

Impact on Various Stakeholders

Transportation Industry

The transportation industry would be among the biggest beneficiaries of including petroleum products in GST. The availability of input tax credit on diesel purchases would significantly reduce operational costs for commercial vehicle operators. The current regime denies input tax credit on petroleum products, creating a substantial cost burden for transportation companies.

Manufacturing Sector

Manufacturing industries that use petroleum products as inputs or fuel would benefit from input tax credit availability. Industries such as chemicals, pharmaceuticals, plastics, and others that rely heavily on petroleum derivatives would see improved cost structures.

State Governments

State governments face the most significant impact from any change in petroleum taxation. States currently enjoy full discretion in setting VAT rates on petroleum products and retain all revenues. Inclusion in GST would subject these revenues to the federal sharing mechanism, potentially reducing state fiscal autonomy.

Consumers

Consumers would likely benefit from reduced tax rates and elimination of cascading effects, potentially leading to lower fuel prices. However, the actual impact would depend on the GST rate applied to petroleum products and the transition mechanism adopted.

Technical Challenges in Implementation

Rate Determination

Determining appropriate GST rates for petroleum products presents significant challenges. The rates must balance revenue requirements with consumer welfare considerations. Given the current high tax burden on petroleum products, bringing them under the existing GST rate structure might require creating new tax slabs or significantly increasing existing rates.

Transition Mechanism

The transition from the current taxation system to GST would require careful planning to ensure revenue neutrality for both the Centre and states. This might involve interim compensation mechanisms or phased implementation approaches.

Input Tax Credit Framework

Integrating petroleum products into the input tax credit system would require modifications to existing systems and processes. The petroleum marketing companies and distributors would need to adapt their billing and compliance systems to accommodate GST requirements.

Contemporary Developments and Future Outlook

Recent GST Council Discussions

Recent GST Council meetings have continued to defer decisions on petroleum products, citing various economic and administrative considerations. The Council has indicated that the matter remains under consideration, but no definitive timeline has been established for inclusion.

Economic Recovery Context

The COVID-19 pandemic and subsequent economic recovery efforts have added complexity to the petroleum GST debate. Both the Centre and states have relied heavily on petroleum taxes to finance pandemic response measures and economic stimulus packages.

Evolving Energy Landscape

The transition toward renewable energy and electric vehicles adds another dimension to the petroleum GST debate. As the economy gradually shifts away from fossil fuels, the long-term revenue implications of petroleum taxes become uncertain, potentially affecting the urgency of GST inclusion.

Conclusion

The question of including petroleum products under GST represents one of the most complex policy challenges in India’s taxation system. The constitutional framework provides clear authority for the GST Council to make this decision, while the legislative structure offers the necessary legal mechanisms for implementation.

The judicial intervention through the Kerala High Court case has brought renewed focus to this issue, demanding genuine policy reasons for continued exclusion. However, the significant revenue implications for both the Centre and states continue to present formidable obstacles to inclusion.

The path forward requires careful balancing of multiple considerations including revenue neutrality, market harmonization, consumer welfare, and federalism principles. While the technical framework for inclusion exists, the political economy considerations surrounding revenue sharing remain the primary impediment.

The eventual inclusion of petroleum products in GST appears inevitable given the constitutional mandate for market harmonization and the logical completion of the GST system. However, the timing and modalities of such inclusion will depend on achieving consensus among stakeholders on revenue compensation mechanisms and transition arrangements.

The debate over GST on petroleum products ultimately reflects the broader challenges of federal taxation in a diverse economy. The resolution of this issue will set important precedents for managing similar challenges in other sectors and will significantly influence the evolution of India’s GST system.

References

[1] Kerala Pradesh Gandhi Darshanvedhi v. Union of India, Kerala High Court, W.P.(C) No.12481/2021 

[2] Constitution of India, Article 279A(5), available at https://www.constitutionofindia.net/articles/article-279a-goods-and-services-tax-council/ 

[3] Central Goods and Services Tax Act, 2017, Section 9(2), available at https://taxinformation.cbic.gov.in/content/html/tax_repository/gst/acts/2017_CGST_act/active/chapter3/section9_v1.00.html 

[4] “Pandemic Not An Excuse, Give Genuine Reasons: Kerala High Court To Centre Over Non-Inclusion Of Petroleum Products Under GST,” LiveLaw, December 1, 2021, available at https://www.livelaw.in/news-updates/pandemic-not-an-excuse-give-genuine-reasons-kerala-high-court-to-centre-over-non-inclusion-of-petroleum-products-under-gst-186742 

[5] “Yields Significant Revenue: Centre Tells Kerala High Court Non-Inclusion Of Petroleum Products Under GST Was ‘A Conscious Decision’,” LiveLaw, December 8, 2021, available at https://www.livelaw.in/news-updates/yields-significant-revenue-centre-tells-kerala-high-court-non-inclusion-of-petroleum-products-under-gst-was-a-conscious-decision-187234 

[6] Goods and Services Tax Council, available at https://www.gstcouncil.gov.in/gst-council 

Editor’s note:

In a recent development (in the year 2021), Kerala HC to GST Council has asked GST Council to specify the reasons for not including petrol and diesel under GST; The Bench led by Chief Justice S Manikumar passed the directive when a writ petition was filed by the Kerala Pradesh Gandhi Darshanavedi, Thiruvananthapuram, challenged the GST Council’s decision not to include the petroleum products under the GST.

The petitioner pointed out that the GST Council meeting had recently decided that it was not appropriate to include petrol and diesel under the GST at this stage. The Council had met to consider a representation given by the petitioner seeking to bring the products under the GST following the High Court directive.

The petitioner said that the Council had not given any proper reasons for rejecting the request of the petitioner. There was no application of mind by the Council. The present situation was ripe enough to decide as the prices of petrol and diesel were surging on a day-to-day basis, creating a ripple effect on the economy. In fact, the people who did not even consume petrol and diesel were also equally affected.

The petitioner pointed out that different prices were being charged for petrol and diesel in various States in the country due to different rates of tax levied by the State government. It impeded achieving harmonised national market as contemplated under Article 279A(6) of the Constitution. The rise in petroleum products had a cascading effect on all commodities including essential ones, leading to an increase in the cost of living. The prices of fuel need to be rationalised.