GST Council Hikes Tax on Oil, Gas Services
Oil exploration GST jumps to 18%, impacting production.
The GST Council on Thursday, September 4, 2025, approved a significant tax hike on oil and gas exploration and production services, raising the rate from 12% to 18%, effective September 22. The decision, announced in New Delhi, has sparked concerns about escalating production costs and shrinking margins for upstream companies, threatening efforts to boost domestic output and reduce reliance on imports.
The increased GST applies to services related to exploration, mining, or drilling of petroleum crude and natural gas, as well as associated support services, with input tax credit (ITC) available. However, industry experts warn of severe repercussions. Prashant Vasisht, Senior Vice President at Icra Ltd, noted that since crude oil and natural gas remain outside the GST framework, companies cannot offset the higher production costs through sales, leading to stranded taxes. “This will increase the cost of production without an offset, hitting upstream companies hard,” Vasisht said.
The timing of the hike compounds existing challenges. Global oil and gas prices have softened since April 2025 due to economic headwinds and OPEC+ production adjustments, squeezing realizations for upstream firms. “Moderating revenues combined with higher costs is a double whammy that could render some assets unviable,” Vasisht added, highlighting the risk of stalled development projects.
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Dhaval Popat of Choice Institutional Equities echoed these concerns, warning that the 18% GST rate will make exploration and production (E&P) projects, particularly coal-bed methane (CBM) initiatives, less competitive. “This hike will compress corporate margins and create headwinds for boosting domestic production,” Popat said, emphasizing the setback to India’s energy security goals.
As the industry braces for increased operational costs, the GST hike has raised alarms about its broader impact on investment and growth in the oil and gas sector. With no immediate relief in sight, stakeholders are urging the government to reconsider the decision to mitigate the financial strain on an already challenged industry.
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