After excise duty cut on petrol and diesel, SBI Research sees scope for VAT relief

After the central government slashed excise duty on petrol and diesel by ₹10 per litre to shield consumers from a sharp surge in global crude oil prices, SBI Research has suggested that states have room to cut value-added tax (VAT).

In a recent report, SBI Research said higher crude prices are likely to boost states’ VAT collections from petroleum products, creating fiscal space for tax rationalisation at the state level.

“States can act to cut VAT rates and pass on the benefit to consumers,” the report said, noting that the burden of high fuel prices can now be shared more evenly between the Centre and states.

The suggestion comes at a time when Brent crude prices have climbed sharply amid the ongoing West Asian crisis, rising from an average of $64.7 per barrel in January to about $96.2 per barrel so far in March. The Indian crude basket has also seen a sharp jump.

Citing oil ministry data, SBI Research said oil marketing companies (OMCs) are currently incurring losses of around ₹24 per litre on petrol and ₹30 per litre on diesel due to the freeze in retail prices.

To ease the burden, the government reduced the special excise duty on petrol from ₹21.9 per litre to ₹11.9 per litre and on diesel from ₹17.8 per litre to ₹7.8 per litre.

The government has imposed a windfall tax of ₹21.5 per litre on diesel exports and levied a Special Additional Excise Duty on aviation turbine fuel (ATF) of ₹50 per litre to partly offset revenue losses,

SBI Research estimates that while the excise duty cut could lead to a revenue loss of about ₹2.1 lakh crore, the increased duties on diesel exports and ATF may fetch around ₹0.93 lakh crore, resulting in a net revenue loss of approximately ₹1.1 lakh crore for the Centre in FY27. The impact in FY26 is expected to be minimal.

According to SBI Research, states are likely to benefit from higher VAT collections due to elevated crude prices, even without any change in tax rates.

It estimated that states could see an additional ₹25,000 crore in VAT revenue in FY27, assuming consumption levels similar to the previous year. In March alone, states are estimated to have gained around ₹2,500 crore incrementally from higher oil prices.

States had earned about ₹3.02 lakh crore from VAT on petroleum products in FY25.

The report noted that this incremental revenue provides an opportunity for states to recalibrate VAT rates, which vary across regions, to ease the burden on consumers.