- Business Setup
For Foreign Companies
For Indian Companies
GIFT City
- GCC Setup
- Corporate Services
Taxation Services
Advisory & Regulatory
Accounting Services
- Who We Are
- Contact Us
For Foreign Companies
For Indian Companies
GIFT City
Taxation Services
Advisory & Regulatory
Accounting Services
If you are a foreign business planning to set up in India, Value Added Tax or VAT is a term you might be already aware of. The natural assumption is that it no longer applies, after the introduction of GST back in 2017and it is mostly correct. But VAT tax in India did not vanish completely. It still applies to petrol, diesel, aviation turbine fuel, petroleum crude, and alcohol for human consumption. These categories were kept outside GST when the reform took place, and as of 2026, they remain outside it. If your business touches any of these, VAT charges in India are something you should keep in mind.
VAT in India is set by each state independently, and the difference can be significant. The Petroleum Planning and Analysis Cell, which operates under the Ministry of Petroleum and Natural Gas, publishes official state-wise data. According to that data, Telangana charges 35.20% VAT on petrol. Andaman and Nicobar Islands charges 1% on the same product.
For a business running distribution centres or a large fleet across multiple states, those numbers matter. They directly affect location choice, pricing, and working capital. For foreign businesses at the planning stage, this is precisely where business consulting makes a difference.
India’s indirect tax history before 2017 was fragmented. Each state had its own sales tax system with its own rates and rules. Doing business across state lines meant dealing with multiple compliance system simultaneously. VAT, since its inception in 2005 has been addressing this issue. It introduced the concept of input credit, so businesses were not paying tax one after the other at every stage of the supply chain.
GST then took that logic and scaled it nationally. From 1 July 2017, VAT, central excise duty, service tax, and a number of other levies were brought under a single framework. For foreign businesses entering India, this was a meaningful improvement. One registration, one set of returns, one rate structure to understand.
The transition, however, was not absolute. Petroleum products and alcohol stayed outside the new GST framework for fiscal reasons. State governments earn significant revenue from these categories and were not willing to hand that over to a central structure without guaranteed compensation. The Constitution (122nd Amendment) Act, 2016 deferred their inclusion to a future date, to be decided by the GST Council. That date has not come for petrol and diesel. Natural gas and aviation turbine fuel were partially brought under GST in September 2025 at 18%, and domestic LPG sits at 5% GST. But petrol, diesel, and alcohol remain under state VAT.
For businesses in the following categories, VAT charges in India are an active concern as of May 2026:
For everything else, GST applies. Manufacturing, retail, technology, hospitality, professional services, if your business sits in any of those spaces, VAT is largely not something you need to manage day to day.
The state-wise variation in VAT rates is one of the more operationally significant aspects of doing business in alcohol or fuel-intensive sectors in India. The PPAC data from March 2026 shows the following:
| State/UT | Petrol VAT Rate | Diesel VAT Rate |
|---|---|---|
| Telangana | 35.20% | 27% |
| Kerala | 30.08% + INR 1/litre + 1% cess | 22.76% + INR 1/litre + 1% cess |
| Andhra Pradesh | 31% + INR 4/litre + cess | 22.25% + INR 4/litre + cess |
| Karnataka | 29.84% | 21.17% |
| Madhya Pradesh | 29% + INR 2.5/litre + 1% cess | 19% + INR 1.5/litre + 1% cess |
| Delhi | 19.40% | 16.75% + air ambience charges |
| Haryana | 18.20% or INR 14.50/litre (higher) + 5% additional | 16.00% or INR 11.86/litre (higher) + 5% additional |
| Gujarat | 13.7% + 4% cess | 14.9% + 4% cess |
| Andaman and Nicobar | 1% | 1% |
A fuel cost of INR 100 in Andaman and Nicobar becomes INR 135.20 in Telangana. The VAT is the entire difference. For a single vehicle that might seem manageable. Across a fleet of hundreds, or a network of distribution points across states, the compounding effect on operating costs is significant.
These rates are not fixed either. In May 2026, Delhi cut VAT on aviation turbine fuel from 25% to 7%. Maharashtra reduced ATF VAT from 18% to 7% for six months. Both moves were aimed at bringing down airline operating costs. State governments adjust these rates based on their own revenue needs and economic priorities, which means businesses need to track changes continuously rather than relying on figures captured during setup.
Alcohol sits in a category of its own. Under Article 366(12A) of the Constitution, states have full authority over excise duty and VAT on alcoholic liquor for human consumption. The 40% GST slab introduced in September 2025 for sin goods does not apply to alcohol. Every state runs its own regulatory framework with its own rates, licensing structure, and compliance requirements. For foreign businesses, the choice of state is therefore not just an operational decision but a tax-oriented one. Understanding how that choice plays out across VAT, excise, and licensing is worth discussing before committing to a location.
Whatever brought you to search for VAT, the system you will register under, file returns within, and manage on an ongoing basis is GST.
The rate structure is straightforward:
| GST Rate | Examples |
|---|---|
| 5% | Tea, coffee, essential items, domestic LPG |
| 12% | Processed foods, certain accommodation |
| 18% | Most goods and services, furniture |
| 18% | High-end vehicles, air conditioning |
| 40% | Sin goods (Cigarettes) |
Businesses with annual turnover above INR 20 lakh must obtain a GST registration. For special category states, the threshold is INR 10 lakh. Those with turnover up to INR 1.5 crore can opt for the composition scheme, which simplifies filings but removes access to input tax credit.
That input tax credit mechanism is worth understanding properly. Under GST, the tax paid on inputs can be offset against the tax owed on outputs. So, if you paid INR 18 in GST on materials that go into a product, and you owe GST on the sale of that product, the INR 18 is deducted from what you owe. This removes the old cascading effect and has a real positive impact on working capital for businesses operating at scale.
VAT does not work this way in relation to GST. The two systems are different. VAT paid on diesel cannot be offset against a GST liability. It is simply a cost that sits in the expense column. There is no recovery mechanism. This is why for fuel-heavy businesses, VAT is not just a compliance consideration. It is a structural cost that needs to be modelled into financial projections from the beginning.
For businesses that deal in GST and VAT covered products simultaneously, the compliance runs in parallel across two entirely separate systems with no overlap.
GST obligations include registration, periodic return filings, e-invoicing for B2B transactions above INR 5 crore in annual turnover, which has been mandatory since August 2023, and e-way bills for goods movement above INR 50,000. The Goods and Services Tax Appellate Tribunal (GSTAT), launched in September 2025, now provides a dedicated forum for GST disputes. The GSTAT portal comes with Utility, an official offline tool to help taxpayers and professionals to prepare and file second-appeal documents for GST disputes.
VAT requires separate registration in each state where VAT-covered goods are sold, separate return filings, and independent record-keeping for VAT transactions. Disputes go through state-level tribunals. In May 2026, central excise duty on petroleum was also revised through notifications 22/2026 and 23/2026, effective 16 May 2026, which adds to the total tax calculation on these products.
Before committing capital, foreign businesses should seriously consider using the Authority for Advance Rulings under GST. It provides binding clarity on GST liabilities for both residents and non-residents, including those coming in through joint ventures. For VAT, the equivalent mechanism varies by state, which is another reason why tax advisory engagement at the planning stage, rather than after setup, makes a genuine difference.
Finance Minister Nirmala Sitharaman, at a press conference indicated that the petroleum product will eventually come under GST framework. The challenge is that all states need to agree on this decision, however, many of them are reluctant to give up the revenue.
For businesses making long-term investments in fuel-intensive sectors, this is worth building into scenario planning. When full inclusion eventually happens, it will change both the cost structure and the compliance requirements considerably.
VAT tax in India is not something most foreign businesses will spend much time on. For the majority, GST is the framework that governs their operations, and focusing on understanding and managing that well is the right priority. But for businesses in logistics, aviation, fuel distribution, or alcohol, VAT charges in India are a real and ongoing cost. The rate differences between states are large, the rates themselves change, and the costs cannot be recovered through the GST credit mechanism.
The businesses that get this right are the ones that mapped the landscape clearly before they started, understood which tax applied where, and built their cost models and compliance structures accordingly. That preparation is not complex. But skipping it, or assuming VAT is a non-issue because GST exists, is the kind of oversight that tends to surface at exactly the wrong moment. Not sure whether VAT affects your operations in India? Stratrich Consulting works with businesses to answer exactly that question, early on and clearly.
