A Rs 56,500 Crore Question: Why Is Fuel for Tractors Taxed Like Fuel for Luxury Cars?

India’s one crore tractor-owning farming families pay nearly Rs 56,500 crore in taxes on diesel every year. This includes road cess, even though tractors are prohibited from operating on highways. In nine major agricultural nations across the world, diesel used for farming is either tax-free or subsidised; but not in India. Farmers have a clear demand: all taxes on diesel used in agricultural tractors should be abolished.

Tractors Are Not Luxury Vehicles

There is a fundamental flaw in India’s diesel taxation system - tractors have been placed within the same fiscal framework designed for luxury cars and SUVs. A tractor is not a symbol of luxury, but a tool of production that tills the soil, sows crops, and helps produce food for 1.4 billion people. Luxury cars are objects of consumption and comfort, whereas tractors contribute directly to national income. Viewing both through the same fiscal lens is economically irrational.

ATF vs Diesel

The government’s approach towards aviation turbine fuel (ATF) and agricultural diesel is completely different. Uttar Pradesh levies only 1% VAT on ATF, while Bihar reduced VAT on ATF from 29% to 4%. Union ministers regularly write to states urging them to cut VAT on ATF. On the other hand, Maharashtra imposes 21% VAT on diesel, Gujarat 14.90%, and Goa 18.09%, yet no minister has written to states asking them to reduce taxes on diesel used in agriculture. This is not mere neglect, but a deliberate and continuing class bias.

Taxes account for nearly 50-55% of the retail price of diesel. The central government’s taxes and cesses on diesel amount to around Rs 64 per litre, which include:

Road and Infrastructure Cess (RIC): Rs 36 per litre
Special Additional Excise Duty (SAED): Rs 24 per litre
State VAT: 21% in Maharashtra, 14.9% in Gujarat, and 18.09% in Goa

As a result, farmers are estimated to pay nearly Rs 56,500 crore annually in taxes on diesel used for agricultural purposes, including road cess from which they receive no direct benefit. At a time when annual tractor sales have crossed 10 lakh units and agricultural mechanisation is deepening India’s dependence on diesel-powered machinery, this tax burden is becoming a question of survival for farmers.

Mathematics of Rs 56,500 crore

Tax on Diesel and Tractor Loans

More than one crore tractor-owning farmers purchased their tractors through loans from banks or finance companies. Nationalised banks charge interest rates ranging from 9.50% to 11.50%, private banks charge between 10% and 28%, while some finance companies charge interest rates as high as 30.50%. Tractor loans are also excluded from farm loan waiver schemes. The proportion of indebted tractor-owning farmers stands at 82% in Punjab, 78% in Maharashtra, 71% in Uttar Pradesh, and 69% in Telangana.

GST Reduction Welcome, But Insufficient

In September 2025, the 56th GST Council reduced GST on tractors from 12% to 5%. GST on tractor tyres, tubes, and spare parts was also cut from 18% to 5%. This helped tractor sales touch a record 10.50 lakh units in the financial year 2025-26. However, purchasing a tractor is a one-time expense, while diesel consumption is a daily necessity. Over a tractor’s lifespan of 15-20 years, the cumulative tax burden on diesel far exceeds the savings gained from GST reductions.

Tax Treatment of Agricultural Diesel Across the World

Germany: From January 1, 2026, introduced an agricultural diesel rebate of 21.48 euro cents per litre, providing annual relief of around Rs 4,000 crore.
France: In April 2026, suspended all excise duties on agricultural diesel for one month.
United Kingdom: Offers an 80% tax concession on “red diesel” (10.18 pence versus 52.95 pence per litre).
Ireland: A special fund of 100 million euros provides a subsidy of 20 cents per litre on diesel from March to July 2026.
Australia: Under the Fuel Tax Credit (FTC) system, excise duty on diesel used in agriculture is fully refunded.
Canada (Saskatchewan): Farmers receive an 80% tax rebate on diesel.
South Africa: From April 1, 2026, introduced a 100% rebate for agriculture and forestry.
United States and Canada: Lower tax rates apply to coloured diesel used for off-road purposes.
Serbia: Registered farmers receive diesel at subsidised prices.

The Economics of Tax Reform

The excise duty cuts announced in March 2026 are estimated to cause a revenue loss of nearly Rs 1 lakh crore in the financial year 2027. Under this pressure, the government again increased the Special Additional Excise Duty (SAED) and the Road and Infrastructure Cess (RIC) in April 2026. The question is whether it is fair to compensate for this revenue loss at the expense of farmers. One possible solution exists: the central government could compensate states for VAT reductions on agricultural diesel, similar to the GST revenue compensation mechanism.

Three Demands of Farmers

First demand: Zero tax on diesel used in tractors. Like Europe, Canada, and Australia, India should introduce a “red diesel” or tax credit system under which excise duty paid by farmers is refunded.
Second demand: End the practice of classifying tractors on par with luxury cars. Parliament should create an independent legal category for tractors as “agricultural equipment.”
Third demand: Exempt agricultural diesel from the Road and Infrastructure Cess. Ensure transparent utilisation of the Agriculture Infrastructure Development Cess. The central government should write to states urging them to reduce VAT on agricultural diesel to 1-4%.

For small farmers, fuel expenses account for 12-18% of total production costs. Tax exemptions could save each farming family around Rs 4,000-5,000 annually. Agriculture contributes 18% to India’s GDP. According to the FAO, nearly 70 crore Indians cannot afford nutritious food. The annual tax burden per tractor exceeds Rs 56,000. The government allocates budgetary support to airlines in the “public interest,” is food production not in the public interest?

(The author is the President of the All India Kisan Sabha. The views expressed in the article are personal.)