Higher GST on oil and gas exploration to raise production costs
The imposition of higher GST on exploration, development and production of oil and gas will further impact realisation of upstream companies who are already facing headwinds due to lower crude oil prices, ratings agency ICRA said.
Besides, the volatility in global markets coupled with OPEC+ reversing production cuts has moderated earnings of companies such as ONGC and Oil India, which will be further exacerbated due to a higher GST.
“GST has been increased on exploration, development and production of oil and gas from 12 per cent to 18 per cent which would lead to increase in the cost of production of crude oil and natural gas,” said Prashant Vasisht, Senior VP and Co-Group Head of Corporate Ratings at ICRA.
As crude oil and natural gas are outside the purview of GST, an increase in the cost of production without an offset available on sale of these products will lead to stranded taxes, he anticipated.
“As oil and gas prices have moderated significantly since April 2025 on account of global economic headwinds and unwinding of production cuts by OPEC+, realisations of upstream companies have reduced. Accordingly, moderating realisations and increase in cost of production would be a double whammy for the Upstream industry and could lead to some assets not being developed on account of poor returns,” Vasisht added.
Dhaval Popat, Energy Analyst at Choice Institutional Equities said, “Higher GST rate will make exploration & production (E&P) projects—particularly coal-bed methane (CBM) initiatives—less competitive, creating headwinds for efforts aimed at boosting domestic output and reducing import dependence.”
The government has raised the GST from 12 per cent to 18 per cent on petroleum operations undertaken under petroleum exploration licenses or mining leases, granted by the Government of India or any State Government to the ONGC or OIL on nomination basis.
That apart, higher tax is also applicable on petroleum operations undertaken under specified contracts, or petroleum operations undertaken under specified contracts under the New Exploration Licensing Policy. This also applies to petroleum operations undertaken under specified contracts under the Marginal Field Policy (MFP), or coal bed methane operations undertaken under specified contracts under the Coal Bed Methane Policy.
Besides, composite supply of works contract and associated services, in respect of offshore works contract relating to oil and gas exploration and production in offshore areas will attract 18 per cent GST with Input Tax Credit (ITC).
The supply of transportation of natural gas, petroleum crude, motor spirit, high speed diesel or ATF through pipeline will also attract higher GST at 18 per cent with ITC or GST at 5 per cent without ITC.
Other professional, technical and business services relating to exploration, mining or drilling of petroleum crude or natural gas or both will also attract a higher GST of 18 per cent with ITC
Published on September 4, 2025
