The Indian central government is urging state governments to reduce Value Added Tax on fuel to mitigate the impact of recent price hikes.

This move comes as rising crude oil costs and widening under-recoveries for oil companies push pump prices higher, threatening to increase inflation and transportation costs across the country.

Officials are specifically targeting BJP-ruled states to lead the tax reductions. A government source said the Centre may shortly urge states to reduce the tax [1]. The push is intended to soften the blow for consumers after recent price increases that varied by report, ranging from 90 paise [2] to around Rs 5 per litre [3].

Industry analysts said that a fuel price correction became difficult to avoid because input costs rose sharply [4]. To assist in this effort, the central government has already implemented excise duty cuts of ₹10 per litre on diesel and ₹3 per litre on petrol [5].

Some states have already moved to lower taxes on specific fuel types. Maharashtra reduced its VAT on aviation turbine fuel from 18% to 7% [6]. Similarly, the Delhi government cut its VAT on aviation turbine fuel from 25% to 7% [7].

These targeted cuts in aviation fuel aim to benefit airlines and passengers, but the central government is now seeking broader reductions in petrol and diesel VAT to provide wider relief. The Times of India editorial team said states are being urged to cut VAT to cushion consumers from rising pump prices [8].

“The Centre may shortly urge states to reduce the tax.”

The central government's request highlights a tension in India's fiscal structure, where both the center and states rely on fuel taxes for revenue. By urging BJP-ruled states to cut VAT, the center is attempting to manage public dissatisfaction with inflation without committing to a nationwide mandate that could deplete state coffers.