GST on Oil and Gas Exploration Hiked to 18%

Oil and gas exploration and production will cost more after the GST Council approved raising the tax on services rendered for the same to 18% from the current 12%.

The new tax rates will be effective from September 22.

Services relating to exploration, mining or drilling of petroleum crude or natural gas have been increased to 18% with input tax credit (ITC), according to an official note.

The same has also been done for support services to exploration, mining or drilling of petroleum crude or natural gas or both.

The increase in GST "would lead to an increase in the cost of production of crude oil and natural gas," said Prashant Vasisht, Senior Vice President and Co-Group Head, Corporate Ratings, Icra Ltd.

As crude oil and natural gas are outside the purview of GST, an increase in the cost of production without an offset available on the sale of these products will lead to stranded taxes, he said.

"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 (oil and gas producing) companies have reduced. Accordingly, moderating realisations and an 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," he added.

Dhaval Popat, Choice Institutional Equities, said the increase in GST on oil and gas exploration, production, and pipeline services from 12% to 18% will increase operational costs and compress corporate margins.

Higher GST rate will make exploration and 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, he said.