PetroleumRefining

GST on Petroleum & Refining — Big 5 Outside GST, LPG 5%, Naphtha 18%

Complete GST guide for petroleum: crude oil, petrol, diesel, natural gas & ATF kept outside GST (constitutional exclusion), LPG 5%, kerosene (PDS) 5%, naphtha 18%, furnace oil 18%, lubricants 18%, ITC blockage impact, petrochemical chain, refinery compliance, and future inclusion roadmap.

Outside GST

Crude Oil

Outside GST

Petrol (MS)

Outside GST

Diesel (HSD)

Outside GST

Natural Gas

Outside GST

ATF (Aviation Fuel)

5%

LPG (Domestic)

5%

Kerosene (PDS)

18%

Naphtha / Furnace Oil

Petroleum & Refining — GST Framework

Petroleum Products OUTSIDE GST — The Big 5

EXCLUDED FROM GST (Article 279A(5) of Constitution): Five petroleum products are CONSTITUTIONALLY excluded from GST until the GST Council recommends their inclusion: (1) CRUDE OIL: Currently taxed via Excise + State VAT (not GST). Central Excise: ₹1 per tonne (nominal). State VAT: varies (5-20%). CESS: Oil Industry Development Cess — ₹20/tonne. SAED (Special Additional Excise Duty): variable (windfall tax). (2) PETROL (Motor Spirit — MS): Central Excise: ₹19.90/litre. State VAT: 25-40% (varies by state). Delhi example: VAT 19.40%. Maharashtra: 25.5% VAT + ₹10.12 surcharge. Total taxes on petrol: 45-55% of retail price. (3) DIESEL (High Speed Diesel — HSD): Central Excise: ₹15.80/litre. State VAT: 15-30%. Agriculture diesel: some states give VAT exemption. (4) NATURAL GAS: No central excise. State VAT: 5-15%. Administered pricing for APM gas (domestic). Market pricing for non-APM (imported LNG). (5) AVIATION TURBINE FUEL (ATF): Central Excise: 11%. State VAT: 1-30% (huge variation — Rajasthan 1%, Maharashtra 25%). Airlines demand inclusion in GST — currently blocked by states. WHY KEPT OUTSIDE? Revenue reason: States earn ₹2+ lakh crore from petroleum VAT. If included in GST: states lose control over rates. Petroleum VAT is single largest revenue for most states. Political reason: fuel prices are politically sensitive. States want flexibility to cut/raise VAT as needed. Constitutional amendment needed to include these 5 products in GST. GST Council: has discussed multiple times — no consensus. Timeline: likely post-2027 (after transition period ends).

Petroleum Products INSIDE GST — LPG, Kerosene & Others

PRODUCTS UNDER GST: Not all petroleum products are excluded — only the Big 5. Everything else falls under GST: LPG — Liquefied Petroleum Gas: Domestic LPG (subsidized — 14.2 kg cylinder): 5% GST (HSN 2711). Commercial LPG (19 kg cylinder): 5% GST. Industrial LPG: 5%. Auto LPG (for vehicles): 5% (but not popular — taxation makes it unviable). Ujjwala scheme LPG: 5% (subsidy is DBT — separate). KEROSENE: PDS kerosene (subsidized): 5% (HSN 2710). Non-PDS kerosene: 18%. Kerosene for lighting: 5%. Kerosene for industrial use: 18%. NAPHTHA: Naphtha (petrochemical feedstock): 18% (HSN 2710). Used by: petrochemical plants (make plastics, chemicals). ITC available: yes (used in manufacturing). FURNACE OIL / FUEL OIL: Furnace oil (FO): 18% (HSN 2710). Used by: power plants, industrial boilers, ships. Heavy fuel oil: 18%. LUBRICANTS & GREASES: Engine oil (motor oil): 18% (HSN 2710). Brake fluid: 18%. Gear oil: 18%. Industrial lubricants: 18%. Grease: 18%. These are clearly under GST — no dispute. BITUMEN: Bitumen (for road construction): 18% (HSN 2713). Petroleum coke (pet coke): 18% (HSN 2713). Coal tar: 18%. PARAFFIN WAX: Paraffin wax: 18% (HSN 2712). Candle wax: 12% or 18% (depending on grade). Petroleum jelly (Vaseline): 18% (HSN 2712). WAX FOR CANDLES: Plain candles: 12%. Decorative/scented candles: 12%. Tealight candles: 12%.

ITC Blockage — The Biggest Pain Point

ITC BLOCKED ON PETROLEUM (Section 17(5) of CGST Act): Section 17(5)(a): ITC is NOT available on motor vehicles and conveyances EXCEPT for specific purposes. Section 17(5)(a)(i): NO ITC on MOTOR FUEL — petrol, diesel used in vehicles. HOWEVER: There is NO EXPLICIT BLOCKAGE of ITC on petroleum products in Section 17(5). The issue is DIFFERENT: Products OUTSIDE GST: no GST charged = no ITC to claim (there's nothing to claim). Petrol/diesel have NO GST → no ITC question arises. It's not 'blocked' — it simply doesn't exist under GST. IMPACT ON BUSINESSES: Transport companies (trucks running on diesel): Diesel cost: major expense (40%+ of operating cost). NO ITC available (diesel outside GST). Effective cost: full diesel price with embedded state taxes. If diesel were under GST at 28%: ITC would be available → transport costs would fall 15-20%. Airlines (ATF): ATF is 35-40% of airline operating cost. NO ITC (outside GST). Airlines pay VAT on ATF: 1-30% depending on state (leads to 'tankering' — filling up in low-VAT states). If ATF under GST at 18%: massive relief for aviation — ticket prices could fall 10-15%. Manufacturing (using furnace oil/naphtha): Furnace oil (GST 18%): ITC AVAILABLE. Naphtha (GST 18%): ITC AVAILABLE. These are INSIDE GST — normal ITC mechanism works. Diesel generator (DG set): Diesel consumed in DG: NO ITC (diesel outside GST). DG set maintenance: 18% — ITC available (service). Natural gas used in manufacturing: OUTSIDE GST — no ITC. Even if used directly in production (fertilizer plants, power plants). STRANDED COST: Estimate: Indian industry loses ₹1.5-2 lakh crore per year in blocked ITC due to petroleum exclusion. Most impacted: logistics, aviation, agriculture (diesel pump sets), cold chain.

Petrochemical Industry — Under GST

PETROCHEMICALS — FULLY UNDER GST: Petrochemical industry uses naphtha/gas as RAW MATERIAL (not fuel). All petrochemical products are INSIDE GST: POLYMERS/PLASTICS: Polyethylene (PE — HDPE, LDPE, LLDPE): 18% (HSN 3901). Polypropylene (PP): 18% (HSN 3902). PVC (Polyvinyl Chloride): 18% (HSN 3904). Polystyrene: 18% (HSN 3903). PET (for bottles): 18% (HSN 3907). Nylon/polyamide: 18% (HSN 3908). Polycarbonate: 18% (HSN 3907). ABS (Acrylonitrile Butadiene Styrene): 18% (HSN 3903). BASIC CHEMICALS (from petroleum): Ethylene: 18%. Propylene: 18%. Butadiene: 18%. Benzene: 18%. Toluene: 18%. Xylene: 18%. Methanol: 18%. Acetic acid: 18%. Formaldehyde: 18%. SYNTHETIC FIBERS: Polyester staple fiber (PSF): 18% (HSN 5503). Polyester filament yarn (PFY): 12% (HSN 5402). Nylon fiber: 18%. Acrylic fiber: 18%. Viscose (from wood pulp, not petroleum): 12%. SYNTHETIC RUBBER: SBR (Styrene Butadiene Rubber): 18%. Nitrile rubber: 18%. EPDM: 18%. Silicone rubber: 18%. Natural rubber: 5% (separate — not petroleum derived). ITC CHAIN FOR PETROCHEMICALS: Naphtha (input): 18% GST → ITC available. Natural gas (input): OUTSIDE GST → NO ITC (stranded cost). Crude oil (input): OUTSIDE GST → NO ITC. Output products: 12-18% GST. Net position: ITC on naphtha route = efficient. ITC on gas route = cost disadvantage. This creates ECONOMIC DISTORTION: gas-based petrochemical plants (like ONGC Petro) are disadvantaged vs naphtha-based (like Reliance, IOCL).

Refinery Operations & Compliance

REFINERIES — COMPLEX GST POSITION: Indian refineries produce BOTH: GST products (LPG, naphtha, lubricants, bitumen): GST applies. Non-GST products (petrol, diesel, ATF, crude): outside GST. DUAL REGISTRATION: Refineries must maintain: Separate books for GST and non-GST output. ITC apportionment (Rule 42/43): proportional credit. Reversal of ITC attributable to non-GST output. Example (hypothetical): Refinery output: 40% petrol/diesel (non-GST), 30% LPG/naphtha (GST), 30% export (zero-rated). ITC on common inputs (chemicals, catalysts, maintenance): Only 60% available (30% GST output + 30% export). 40% must be reversed (attributable to non-GST petrol/diesel). CHALLENGES: Complex accounting for shared inputs (catalysts serve all products). How to allocate refinery maintenance ITC? How to treat co-generation of products? CBIC clarification: use turnover-based apportionment (Rule 42). JOB WORK IN REFINERIES: Refinery processing crude for other companies (CPCL processing for BPCL): If output is petrol/diesel: NOT a service under GST (product is outside GST). If output is LPG/naphtha: 18% GST on processing charges. Mixed output: apportionment needed. PIPELINE TRANSPORTATION: Crude oil pipeline transport: OUTSIDE GST (crude is excluded). Product pipeline (petrol/diesel): OUTSIDE GST. LPG pipeline: 18% GST (LPG is within GST). Natural gas pipeline: OUTSIDE GST. STORAGE (tank farms): Storage of crude/petrol/diesel: OUTSIDE GST. Storage of LPG/naphtha/bitumen: 18% GST (warehousing service). EXPORTS: Export of petroleum products: ZERO RATED (regardless of whether product is 'inside' or 'outside' GST domestically). Refinery exporting petrol: IGST at Nil (zero-rated export). Can claim refund of input taxes used in production of exported petrol. This is a SIGNIFICANT benefit — refineries prefer export over domestic (ITC refund available).

Natural Gas — Partial Inclusion & Future

NATURAL GAS — COMPLEX POSITION: Currently OUTSIDE GST (one of the Big 5). But used extensively as: Industrial fuel (fertilizer, power, steel). Petrochemical feedstock. City gas (PNG for cooking, CNG for vehicles). CITY GAS DISTRIBUTION (CGD): CNG (Compressed Natural Gas — vehicle fuel): OUTSIDE GST (natural gas). BUT: CNG station service, compression charges: 18% GST. PNG (Piped Natural Gas — domestic cooking): OUTSIDE GST. Industrial PNG: OUTSIDE GST. CGD company (IGL, MGL, Adani Gas): pays NO GST on gas purchase. Charges NO GST on gas sale. BUT: 18% on all services (connection charges, pipeline charges, AMC). ITC position: CGD companies CANNOT claim ITC on capital goods (pipelines, compressors, meters) proportional to non-GST output. Massive ITC blockage. FERTILIZER INDUSTRY: Natural gas is 70% of fertilizer (urea) production cost. Gas cost: OUTSIDE GST → no ITC. Fertilizer output: 5% GST. Result: INVERTED duty + stranded gas cost. Government provides subsidy — but GST structure adds ₹400-500/tonne to fertilizer cost. POWER GENERATION (gas-based): Gas turbine power plants: Gas (fuel): OUTSIDE GST. Electricity (output): OUTSIDE GST (5% rate exists but rarely applied). Both input and output outside GST = no ITC issue. Maintenance/spares: 18% GST — ITC not available (output exempt). FUTURE — WHEN WILL GAS COME UNDER GST? Industry demand: include gas at 5% GST (with ITC). Government position: 'when consensus achieved'. Key blocker: gas-producing states (Gujarat, Rajasthan, AP, Assam) earn royalty + VAT. Losing VAT control = revenue loss for these states. Likely timeline: post-2027 (with compensation to states). Impact if included: Fertilizer cost: -₹500/tonne. CGD companies: full ITC → lower CNG/PNG prices (5-8% reduction). Petrochemicals (gas route): competitive with naphtha route. Power (gas): ITC on maintenance available.

Petroleum Products — GST Rate Table

ItemHSNGST RateNotes
Crude oil2709Outside GSTCentral Excise + State VAT applies
Petrol (Motor Spirit)2710Outside GSTExcise ₹19.90/L + State VAT 25-40%
Diesel (HSD)2710Outside GSTExcise ₹15.80/L + State VAT 15-30%
Natural gas2711Outside GSTState VAT 5-15% applies
ATF (Aviation Turbine Fuel)2710Outside GSTExcise 11% + State VAT 1-30%
LPG (domestic & commercial)27115%Inside GST — subsidized
Kerosene (PDS)27105%Subsidized public distribution
Naphtha (petrochemical feedstock)271018%ITC available — manufacturing input
Furnace oil / Fuel oil271018%Industrial fuel — ITC available
Lubricants & greases271018%Engine oil, brake fluid, etc.
Bitumen (road construction)271318%Used in road/waterproofing
Petroleum coke (pet coke)271318%Fuel & carbon source

Frequently Asked Questions

Why are petrol, diesel, crude oil, natural gas, and ATF kept outside GST?
THE CONSTITUTIONAL EXCLUSION — FULL EXPLANATION: LEGAL BASIS: Article 279A(5) of the Constitution: '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.' KEY WORD: 'recommend the date' — meaning these are NOT excluded permanently. They are kept out until the GST Council recommends their inclusion. It's a DEFERRAL, not an exclusion. WHY DEFERRED — THE REVENUE ARGUMENT: Total petroleum tax revenue (Centre + States): ₹5-6 lakh crore per year. State's share: ₹2+ lakh crore (State VAT on petrol/diesel). If included in GST at, say, 28%: Revenue neutral rate on petrol would need to be ~40-50% (impossible under current slab structure). States would lose INDEPENDENT ability to tax (GST rates are uniform). Compensation mechanism would be needed (already expired in 2022). WHAT HAPPENS IF INCLUDED? Scenario: Petrol at 28% GST (highest slab): Current retail price ~₹100/L (varies by city). Current tax component: ~₹50/L (excise + VAT + cess). Under GST at 28%: tax would be ~₹25-30/L. Price would FALL to ₹70-80/L. Revenue loss: ₹2+ lakh crore for government. OR: GST rate would need to be 100%+ (impractical). STATES' OBJECTION: Kerala, Maharashtra, Tamil Nadu, Karnataka: highest petroleum VAT collectors. They would lose ₹30,000-50,000 crore each if petroleum enters GST. No compensation mechanism currently exists (GST compensation expired June 2022). States want: (a) guarantee of revenue, (b) ability to levy cess over GST, (c) special category. CENTRE'S POSITION: 'Happy to include' — but states must agree to revenue-sharing formula. Multiple discussions in GST Council — no consensus. Finance Ministry: 'ball is in states' court'. CONSUMER IMPACT IF INCLUDED: Petrol price: could fall ₹20-30/L. Diesel price: could fall ₹15-25/L. ITC availability: transport, logistics, aviation costs would DROP dramatically. Inflation: would reduce by 1-2% (transport cost reduction cascades through economy). GDP boost: estimated 0.5-1% GDP growth from lower fuel costs. REALISTIC TIMELINE: 2024-2025: unlikely (election year, no political will). 2026-2027: possible (if compensation formula agreed). After 2027: most likely (transition period fully over, states more willing). Phased approach: Natural gas first (least revenue impact), then ATF, then diesel, then petrol (most politically sensitive).
How does ITC work for a company that uses both GST (naphtha/LPG) and non-GST (petrol/diesel) petroleum products?
ITC APPORTIONMENT FOR MIXED PETROLEUM USE — PRACTICAL GUIDE: SCENARIO: Manufacturing company uses: (a) Diesel in DG sets (non-GST). (b) Naphtha as feedstock (GST 18%). (c) LPG for heating (GST 5%). (d) Furnace oil for boiler (GST 18%). (e) Petrol for company cars (non-GST). ITC RULES: DIRECT ATTRIBUTION: Naphtha purchased solely for manufacturing: FULL ITC available (directly attributable to taxable output). Furnace oil for boiler (used in manufacturing): FULL ITC available. LPG for process heating: FULL ITC available. Diesel for DG set: NO ITC (product outside GST — no GST charged on purchase). Petrol for cars: NO ITC (outside GST + Section 17(5) blocks motor vehicle fuel even if GST applied). COMMON INPUTS (shared between GST and non-GST activities): Example: Maintenance services for refinery that produces BOTH petrol (non-GST) and LPG (GST). Rule 42 applies: proportional reversal based on turnover ratio. Formula: Eligible ITC = Total ITC × (Taxable turnover / Total turnover). If company has: Taxable turnover (GST products): ₹60 crore. Exempt/non-GST turnover: ₹40 crore. Total: ₹100 crore. ITC on common inputs: ₹5 crore. Eligible ITC: ₹5 crore × 60% = ₹3 crore. Reversed/blocked: ₹2 crore (attributable to non-GST output). CAPITAL GOODS (Rule 43): Machinery used for BOTH GST and non-GST output: ITC proportional (same turnover ratio). Annual recalculation required. REFINERY-SPECIFIC ISSUES: Catalysts used in refining (serve all products): proportional ITC. Hydrogen plant (used in desulfurization of all fuels): proportional. Cooling towers / utilities (shared): proportional. Marine insurance (for crude import): NO ITC (crude is non-GST). PRACTICAL TIP: Maintain separate cost centers: GST products vs non-GST products. Direct attribution wherever possible (maximizes ITC). Common costs: minimize by proper accounting allocation. Annual true-up under Rule 42(2): recalculate based on actual turnover at year-end.
What's the GST position of petroleum retail (petrol pumps/gas stations)?
PETROL PUMP / GAS STATION — GST ANALYSIS: FUEL SALES (petrol/diesel): Outside GST — no GST charged on fuel sales. Dealer commission: This is where it gets INTERESTING. Dealer margin/commission (difference between depot price and retail price): OUTSIDE GST — it's part of the petroleum product price, not a separate service. No GST on dealer margin for petrol/diesel. OIL COMPANY-DEALER RELATIONSHIP: The dealer is NOT providing a 'service' to oil company. Dealer buys petrol at depot price (tank-wagon price). Sells at retail price (OMC-fixed). Difference is dealer's margin — NOT commission. Therefore: no GST on this activity. CONVENIENCE STORE (inside petrol pump): Packaged food items: 5-18% GST (regular rates). Beverages (packaged water, soft drinks): 18-28%. Snacks: 12-18%. Cigarettes: 28% + cess. Lubricants sold at pump: 18%. Air fresheners, wipers, accessories: 18-28%. Convenience store: SEPARATE GST registration may be needed (or combined). ALLIED SERVICES AT PUMP: Car wash: 18% (cleaning service). Tyre inflation (if charged): 18%. Puncture repair: 18% (repair service). Oil change/servicing: 18%. EV charging station (at pump): 18% on charging service + 5% on electricity. CNG dispensing: OUTSIDE GST (natural gas). LPG auto-fill: 5% (LPG is under GST). FOOD COURT / RESTAURANT AT PUMP: McDonald's, Subway, etc. at highway pumps: 5% (restaurant service — no ITC). Standalone food stall: 5%. Franchise fee paid by food operator to petrol pump: 18% (licensing service). ADVERTISING: Hoardings/banners at petrol pump: 18% (advertising space rental). Brand visibility by oil company: part of dealership agreement — not separate GST. TANK TRUCK (delivery): Tanker transporting fuel from depot to pump: OUTSIDE GST (transport of non-GST goods). But: transportation of LPG cylinders: 5% or 12% (GTA service — because LPG is under GST). This creates OPERATIONAL COMPLEXITY: same tanker, same route — different GST treatment based on WHAT'S being transported.
How does India's petroleum taxation compare globally, and what's the roadmap for GST inclusion?
GLOBAL COMPARISON & INDIA'S ROADMAP: GLOBAL PETROLEUM TAXATION: USA: Federal excise: $0.184/gallon (~₹3.6/L). State taxes: $0.10-$0.60/gallon. Total tax: 15-25% of retail price. No GST/VAT (sales tax only). UK: Fuel duty: £0.5295/L (~₹55/L). VAT: 20% on (price + duty). Total tax: 55-60% of retail price. EU AVERAGE: Excise: €0.35-0.70/L. VAT: 19-27% (on price including excise). Total: 50-65% of retail price. UAE/GULF: Near-zero tax. Subsidized prices (oil-producing nations). INDIA: Total tax: 45-55% of retail price (comparable to EU). But: NO ITC available (unlike EU where businesses reclaim VAT on fuel). This means: Indian businesses pay 45-55% tax on fuel WITH NO RECOVERY. EU businesses: pay 50-65% but RECOVER 19-27% as ITC. Net effective tax on business fuel use: India ~50% vs EU ~35-40%. DISADVANTAGE for Indian exports (embedded fuel tax in product cost). ROADMAP FOR INCLUSION (Likely Phased Approach): PHASE 1 (Most likely first — 2026-27): Natural gas inclusion at 5% GST. Why first: least revenue impact (₹15,000-20,000 crore). Biggest beneficiaries: fertilizer, CGD, petrochemicals. Strong industry lobby (Ambani, Adani — both in gas). Already partially in GST ecosystem (LPG from gas is under GST). PHASE 2 (2027-28): ATF (Aviation Fuel) at 18% GST. Why: Airlines are politically vocal, tourism sector demands it. Revenue impact: moderate (₹8,000-10,000 crore). Global embarrassment: India is ONLY major country where ATF has no ITC. Would boost: tourism, aviation connectivity (cheaper tickets). PHASE 3 (2028-30): Diesel at 28% GST + cess (to maintain revenue). Why diesel before petrol: 70% used commercially (transport, agriculture). ITC availability would TRANSFORM logistics costs. Revenue impact: ₹2+ lakh crore — needs compensation formula. Cess: likely ₹10-15/L GST Compensation Cess (like luxury cars). PHASE 4 (Post-2030): Petrol at 28% + cess. Most politically sensitive — directly affects voters. Will be last (even if economically it should be first). Revenue-neutral rate: would need 50%+ GST (or 28% + heavy cess). ALTERNATIVE PROPOSAL (Revenue-neutral): Some economists suggest: Petrol/diesel at 28% GST + States allowed 'petroleum cess' (up to 15%). Total: 28% GST + 15% cess = 43% (close to current). ITC on 28% available; cess non-creditable. States retain revenue through 'cess'. This is the MOST LIKELY final structure when inclusion happens.

Petroleum & Refining GST — ITC Optimization & Multi-Tax Compliance

Laabam.One handles petroleum GST complexity: ITC apportionment (Rule 42/43) for refineries, petrochemical ITC chain optimization, mixed GST/non-GST product accounting, LPG/naphtha/furnace oil credit management, export zero-rating for petroleum products, and compliance for dual-regime businesses.

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