In September 2025, the Indian government launched a sweeping reform of the the Goods and Services Tax framework what has been widely dubbed “GST 2.0.” The idea behind this restructuring is to simplify a complex tax structure and to pass more benefits directly to consumers. Under the new regime, many previously distinct GST slabs have been rationalised.
The old four‑rate structure is replaced by a leaner set of rates: 5 percent for essentials, 18 percent for standard goods and services, and a higher 40 percent slab for luxury and sin goods. This change has implications across the economy, from daily consumables all the way to vehicles and energy.
While petrol, diesel, and CNG have long stayed outside the purview of GST bearing instead excise duties and state VAT the reforms extend into the auto sector and other fuel‑adjacent domains, prompting hopes of indirect relief on fuel prices.
How Fuel Pricing Works Now
To understand how GST might affect petrol, diesel, and CNG prices, it helps to look at current tax structures. Petrol and diesel are currently subject to central excise duties, state-level VAT or sales tax, and various cesses and surcharges. For example, as of an April 2025 notification, the central excise duty on petrol was revised to ₹13 per litre, and on diesel to ₹10 per litre. These excise changes adjust only one piece of the tax mix. Many other components remain in place at the state and local levels.
Because fuel has been kept outside GST, the different states impose varying rates of VAT or sales tax, which leads to price variations across states and even between cities within the same state. The federal government has argued that bringing fuel entirely under GST would jeopardize state revenues, making the transition politically and fiscally tricky.
In public statements, the Petroleum Ministry has said that unless global crude oil prices drop significantly, there is limited room for immediate reductions in fuel prices. That means any relief consumers see will likely come through tax reform rather than through a drop in the base cost of oil.
What the Reforms Announced
Under the new GST 2.0 structure, the automotive sector is one of the key beneficiaries. The GST Council approved lower tax rates on small cars, motorcycles, and three‑wheelers so that petrol, CNG, and LPG cars having engines up to 1,200 cc (and length not exceeding 4,000 mm) will now be taxed at 18 percent GST, down from 28 percent earlier. Diesel cars with engines up to 1,500 cc (also under 4,000 mm in length) will also come under the reduced 18 percent slab. Three‑wheelers and motorbikes (below certain engine capacities) are similarly shifted to the 18 percent slab. Larger or luxury vehicles that exceed set engine size or length limits will fall into the 40 percent slab.
These changes eliminate many intermediate cess and surcharge components that had layered onto vehicle costs. For mainstream entrants like popular hatchbacks and compact sedans, that translates to meaningful cuts in ex‑showroom and on‑road prices.
Although the reforms target the auto and vehicle sector more directly, their ripple effects may be felt in fuel consumption patterns and indirectly in fuel pricing.
Will Petrol, Diesel, and CNG Prices Actually Drop?
Despite the optimism stirred by the GST revamp, the direct impact on petrol, diesel, and CNG is likely to be modest at best, at least initially. Since fuel remains outside the GST regime, its major taxes excise, VAT and state levies must be reworked separately to produce a noticeable drop. Even with a favourable GST environment, fuel companies and state governments would need to absorb losses in tax revenue or reallocate tax burdens elsewhere.
Any relief is more plausible via marginal adjustments in excise duty or state VAT rather than a wholesale shift. But even small reductions in tax slivers can nudge down retail fuel prices by a few rupees per litre or per kilogram for CNG. The benefit may first appear in states with higher current VAT rates, narrowing inter‑state fuel price disparities.
Another factor is global crude oil prices. If international rates stay steady or rise, even a substantial tax cut might be offset by the input cost. The government and regulators must balance fiscal sustainability with relief to consumers. Therefore, while the GST reforms and auto sector tax cuts create a more favorable climate for lower costs, the actual pass‑through to fuel prices will depend on concurrent policy moves in excise, state levies, and market factors.
Implications for Consumers and the Auto Market
Consumers stand to gain in more ways than one. First, smaller petrol, diesel, and CNG vehicles are becoming more affordable owing to the GST cut in the auto sector. The reduced costs may lead more drivers to opt for newer, more fuel‑efficient vehicles, shifting demand patterns. Second, over time, with greater volumes of newer vehicles on the road, there may be political and fiscal pressure to simplify or lower fuel taxation.
In the near term, the sectors close to fuel use public transport, logistics, last‑mile delivery may experience cost relief both via lower vehicle prices and potentially lower running costs if fuel taxation is also aligned downward. As demand potentially increases, economies of scale could reinforce downward pressure on costs.
For businesses reliant on vehicles and fuel, even small downward shifts in pricing can compound into meaningful savings when multiplied across many vehicles and large volumes of fuel consumption.
Challenges and Caveats
One major challenge is the revenue trade‑off for state governments. Many states rely heavily on the VAT component of fuel taxation for their budgets. If those revenues shrink, states may oppose or delay reforms. Political resistance is likely, especially in regions where fuel tax contributes significantly to the exchequer.
Another caveat is that reductions may come piecemeal rather than in one sweeping move. There is also the risk that the benefit is partially absorbed by intermediaries rather than passed fully to end consumers. Monitoring and regulation will matter in ensuring transparency in price adjustments.
Additionally, the reforms do not guarantee uniform benefit across India. States with lower VAT or efficient tax systems may see less dramatic changes. The ultimate impact will be uneven, depending on each state’s tax structure, political will, and administrative agility.
Looking Ahead
Over time, as the new GST architecture settles and as political momentum builds, deeper reform may reach direct taxation on fuel. The auto sector restructuring is a step in that direction. Observers will watch for signals in upcoming budgets or state fiscal adjustments about how far fuel tax reform might go.
If global crude prices soften further, the government may be more comfortable passing substantial relief to consumers. When combined with deeper structural tax reform, fuel prices could see meaningful and sustained declines. Until then, small gains from excise tweaks, better tax alignment, and greater efficiency in vehicle usage are the most likely path forward.
The new GST framework has the potential to reshape costs throughout the supply chain. While petrol, diesel, and CNG may not yet be fully inside the GST net, the reforms open doors. For consumers, the coming months may bring incremental relief. For policymakers, the challenge will be to extend reforms responsibly without undermining fiscal stability.
Disclaimer: This blog is for informational purposes only. Fuel prices and GST rates are subject to change based on government policy. Readers should verify current rates from official sources. The author is not liable for any financial decisions made based on the content of this article.