Why are petrol, power, and property still outside GST, and why does it matter?

GST was meant to be one tax on everything. Yet four of the biggest things Indians spend on never came into its fold: petrol and diesel, electricity, liquor, and real estate. They were left out deliberately to get the states to agree to GST.

When GST subsumed most state taxes in 2017, fuel and alcohol were too lucrative for the states to give up. Petroleum and alcohol together still account for about a quarter to a third of a typical state’s own tax revenue (PRS). Stamp duty on property is another such lever, which is why land and finished buildings stay out too. Petrol sits in a strange limbo: the constitution already places it inside GST’s reach, but at a “nil” rate that holds until the Council votes to change it, which it never has. The reason is that the top GST rate, even the new 40%, is far below the combined central-and-state tax that today makes up roughly half the fuel price at the pump. Bringing fuel in would mean swallowing that revenue loss and giving up a knob both governments love to turn: the Centre raised fuel excise sharply when oil prices crashed, and states crank up VAT whenever budgets tighten. So nobody moves.

The carve-outs were contested from the start. GST’s own blueprint, the Thirteenth Finance Commission’s 2009 Task Force report, wanted a single low rate on everything. It named electricity duty and stamp duty among the taxes to be folded in, called for real estate, power, and financial services to be brought inside, and proposed taxing fuel, tobacco, and liquor within GST with a separate excise on top to capture their extra social costs, not leaving them out entirely. It warned that every sector left outside breaks the credit chain and lets cascading back in.

The states had already reached the opposite conclusion. Their own founding document that year, the First Discussion Paper of the Empowered Committee of State Finance Ministers, kept alcohol out entirely (“Alcoholic beverages would be kept out of the purview of GST”) and placed the main petroleum products outside as well (“the basket of petroleum products, i.e. crude, motor spirit (including ATF) and HSD would be kept outside GST as is the prevailing practice in India[;] Sales Tax could continue to be levied by the States on these products”) (Empowered Committee, 2009). The reason was revenue: fuel and liquor were among the states’ biggest earners, and they would not pool them. That design, not the Task Force’s, is the one that prevailed, and economists have pressed the same objection at every reform since.

A VAT stays clean only if the tax paid on inputs can be claimed back all the way down the chain. Electricity and diesel run nearly every factory, and cement and steel build every flat, yet the tax on all of them, sitting outside GST, can never be credited. It lodges in costs and is taxed again at the next stage: the “tax on tax” GST was built to kill (see “Why was GST seen as a landmark reform in 2017?”), smuggled back through the economy’s largest inputs.

This is the heart of why critics call India’s GST a VAT “in form, not in function” (see “Is India’s GST a real VAT?”). The carve-outs were the price of passing GST in a federation, but they shrink the base and break the input-tax credit chain.