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What is VAT: Amid rising crude oil prices, the government has increased the prices of petrol and diesel by ₹3 per litre. Rates are different in different big cities, but people often wonder why the prices of petrol and diesel are different in different states. The biggest reason for this is VAT, or Value Added Tax. What is this tax and how is it made? Let us explain it.

The central government levies excise duty, while state governments collect VAT, and this tax causes major differences in fuel prices across states. VAT is a tax which is decided by the state governments based on their understanding. This is the reason why petrol and diesel appear more expensive in some states, while VAT is less in some union territories. Many states levy VAT on a percentage basis, while others also add a fixed tax and cess per litre.

What is VAT?

VAT, or Value Added Tax, is a tax that is levied at every stage of increasing the price of a good or service. Simply put, when value is added to a product, the government levies tax on that added value. Ultimately, the entire burden falls on the consumer, who pays the ultimate price.

That is why the prices of petrol and diesel differ in different states. In states where VAT is high, fuel becomes more expensive. However, in states where VAT is less, people get some relief. VAT is also a big source of revenue for state governments. Sales of petrol and diesel generate revenue worth thousands of crores of rupees, which is used on roads, electricity, water and other government projects.

Petrol and diesel out of the scope of GST

Petrol and diesel are currently out of the scope of GST. Therefore, Central Excise Duty, State VAT, Road Cess and Dealer Commission are added separately. Bringing petrol and diesel under GST may bring some relief in prices, but it will affect the state tax revenue. For this reason, state governments remain cautious about reducing VAT.

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