India is the world's third-largest energy consumer, and thus it's important to understand how ethanol is redefining the energy sector and playing a significant role in shaping the industrial landscape today.
Ethanol, also called 'ethyl alcohol' or 'alcohol', has long been considered a valuable resource for energy production. It is an organic chemical compound with chemical formula C2H5OH, which is produced from raw materials such as sugarcane, molasses, wheat, barley, and through the fermentation of sugars found in these plant-based raw materials. The versatile nature of ethanol highlights its economic and industrial significance as it is more than just a fuel additive. It is widely used across various sectors, including energy, industry, healthcare, and food and beverage.
Ethanol is a less polluting fuel and emits fewer harmful pollutants. It is said that one crore litres of ethanol blended petrol can save around 20,000 tons of carbon dioxide (CO2) emissions. The production of ethanol also provides a constant demand for agricultural products, which helps in promoting rural development and leads to the growth of the economy as it encourages farmers in cultivating crops that yield ethanol and generate better income.
Interestingly, the idea of using ethanol as an automobile fuel is not new, as its use can be traced back to the invention of the internal combustion engine in the late 19th century. Nikolas A Otto in the year 1897 examined it as an automotive fuel during his early engine studies.1
India started blending ethanol in petrol on a pilot basis in 2001, and in the year 2003, the Ethanol Blended Programme (EBP) was launched in India.2 In 2008, the Ministry of New & Renewable Energy established a National Policy on Biofuels to limit the country's future carbon footprint and dependence on foreign crude. However, under the Modi government, the country has witnessed a surge in the production of ethanol. It was in the year 2018 that the Government of India notified the National Policy on Biofuels, 2018, wherein, under the Ethanol Blended Petrol (EBP) Program, an indicative target of 20% blending of ethanol in petrol by 2030 was laid out. As of 2024, India has already successfully achieved a 15% ethanol blending rate and aims to achieve the 20% target by 2025-26.
Thus, for a developing country like India, ethanol not only acts as a better renewable source of energy by contributing to a cleaner environment but also strengthens the rural economy by benefiting the farmers.
The Indirect Tax Structure of Ethanol & The Rationale Behind Lower GST Rate on Crude Ethanol:
It is important to distinguish between ethanol and crude ethanol to understand the indirect tax structure of ethanol. Ethanol, as used in industries and fuel blending, is a refined and purified form of alcohol that has undergone processes to remove impurities and water and is 99.9% pure. Crude ethanol, on the other hand, is the first product of fermentation and is the ethanol that has not been purified or distilled to remove the impurities.
The Ethanol Blended Petrol (EBP) Programme was launched in January, 2003 with an objective to promote the use of environment friendly alternative fuels in order to reduce import dependency.3 In 2021, the Government lowered the Goods and Services Tax (GST) rate on ethanol meant for blending under the Ethanol Blended Petrol (EBP) Programme to 5% from 18%.4Thus, the GST rate for ethanol used under the Ethanol Blended Petrol (EBP) Programme attracts 5%, whereas crude ethanol still continues to be taxed at 18%.
The following table shows the existing GST rate structure of Ethanol:
|
Schedules |
S. No. |
Chapter / Heading / |
Description of Goods |
CGST Rate (%) |
SGST / UTGST Rate (%) |
IGST Rate (%) |
|---|---|---|---|---|---|---|
|
I |
102A |
2207 |
Ethylalcoholsupplied to Oil Marketing Companies or Petroleum refineries for blending with motor spirit (petrol) |
2.5 % |
2.5% |
5% |
|
III |
25 |
2207 |
Ethylalcoholand other spirits, denatured, of any strength [other than ethylalcoholsupplied to Oil Marketing Companies or Petroleum refineries for blending with motor spirit (petrol)] |
9% |
9% |
18% |
While the Government is continuously trying to promote the development and adoption of flex-fuel vehicles (vehicles that are modified and capable of operating entirely on gasoline or any blend of gasoline and ethanol) among manufacturers and consumers, making ethanol more economically viable is the need of the hour.
The availability of E20 (20% ethanol blended fuel)has also increased to over 12,000 fuel outlets since the Prime Minister's announcementon E20 in 2023. And in March 2024, Ethanol 100 has been launched at 183 IndianOil Retail Outlets across five states – Maharashtra, Karnataka, Uttar Pradesh, New Delhi, and Tamil Nadu.5 As of today, there are approximately 400 fuel stations across India that offer 100% ethanol fuel. Additionally, major automobile companies like Tata, Toyota, Mahindra, Hyundai, Suzuki, Bajaj, TVS, Hero, etc., are also in the process of launching their flex-fuel vehicles capable of running on 100% ethanol.
But, despite these developments, the high rate of GST on crude ethanol remains a significant barrier for manufacturers and consumers. The current GST rate on crude ethanol is 18%. This high rate of tax inflates the production costs, which makes it harder for manufacturers and consumers to completely switch to ethanol-powered vehicles. This is also affecting India's 20% blending rate target under the EBP Programme, thereby slowing down India's transition to a sustainable and eco-friendly transportation system.
However, on 12th June 2025, the Union Road Transport Ministry in its wishlist, has sought the reduction of GST on crude ethanol to 5% from 18%. The Ministry's comment seeking a reduction in GST rate on ethanol blending was with the agenda to encourage the manufacture and sale of flex-fuel vehicles. It shall boost India's biofuel capacity, reduce fossil fuel and import dependence, lower carbon emissions, and at the same time boost the agricultural sector, further helping India in achieving its 20% blending rate target in advance by 2025-26, from 2030.
But the consumer uptake of the flex-fuel vehicles in India remains relatively low, primarily because of the limited availability of the flex-fuel vehicles and the fact that most of the consumers are still unaware of the advantages that ethanol offers as an alternative fuel. However, those who are aware have also raised concerns about fuel efficiency, vehicle performance, engine durability, and the higher cost of maintenance. Many industry experts also believe that these issues have not received sufficient attention, as the focus of the policymakers has always been on the fiscal and environmental advantages of ethanol blending.6 Although the practical concerns of the consumers are often overlooked, they remain key barriers that affect the consumer's decisions to adopt the flex-fuel vehicles.
As India is steadily building a robust and sustainable energy ecosystem which aligns with the vision of Viksit Bharat, it is important to note that the decision to lower the GST rate is at a time when the centre and the states are continuously trying to rationalise the GST rate structure. By simplifying and streamlining the indirect taxation system, the Government is also trying to improve the 'ease of doing business' among the manufacturers and traders of the country. At the same time, this also highlights the intent of the Government to build a taxation system that favours the ethanol blending process.
Since the Government is already in the process of lowering the GST rate on crude ethanol, if a more holistic approach is adopted by the Government that also addresses the practical concerns of the consumers, it will encourage the consumers to switch to ethanol-powered vehicles, thereby mitigating climate change and improving the air qualityof our country. Along with the Government's agenda to reduce fossil fuel dependence, necessary measures should also be taken to ensure that the ethanol fuel stations are set up at reasonable distances and are easily accessible to consumers.
Thus, India's commitment in reducing its dependence on fossil fuels and moving towards a transportation system that is more environment friendly has led to significant developments in promoting ethanol as an alternative fuel. And, revising the GST structure on ethanol by implementing the proposed 5% GST rate on crude ethanol will help in encouraging the consumers to adopt the flex-fuel vehicles and contribute to a cleaner environment.
Footnotes
1 Prashant Kiran, 'Ethanol as Fuel', (Vikaspedia, Government of India, 17 August 2023)
2 Press Information Bureau, Government of India 'Ethanol Growth Story', (04 November 2021)
3 Viji, 'Ethanol Blended Petrol Programme', Vikaspedia, Government of India (24 October 2024)
4 Press Information Bureau, 'Tax Breaks on Ethanol' (16 December 2021)
5 Press Information Bureau, 'Ethanol 100 fuel launched by Petroleum Minister Hardeep S Puri', (15 March 2024)
6 Kalpana Pathak & Shally Mohile, 'Consumers lack awareness of E20's impact on vehicles, say experts', The Economic Times, (01 April 2023)
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