GST hike on E&P: Govt chalking out plan to compensate upstream oil firms

The oil ministry is considering a scheme to compensate upstream companies for higher costs after GST on E&P services rose to 18 per cent, raising concerns of stranded taxes

The government is working on a scheme to compensate upstream oil and gas companies -- those engaged in exploration & production (E&P) -- for the higher input costs they will incur owing to the recent increase in goods and services tax (GST) on their activities, a senior government official said.

 

“We are assessing an expenditure-side scheme to compensate upstream companies, something to look at the stranded taxes. Higher GST eats into the companies’ margins. The proposal will be sent to the finance ministry for approval,” the official said.

 

As crude oil and natural gas are outside the purview of GST, an increase in the cost of exploration, development, and production -- owing to higher GST on services like hiring drilling rigs, etc -- without an offset available on the sale of these products, will lead to stranded taxes.

 

An email sent to the oil ministry seeking comments on the plan remained unanswered.

 

The move comes as upstream companies are accelerating deepwater and ultra deepwater exploration, which requires a higher cost of exploration, to boost domestic production. India’s upstream industry includes Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL), both state-run, along with private players such as Reliance Industries Ltd and Vedanta’s Cairn Oil & Gas.

 

On September 3, the GST Council raised the rates of tax in the oil and gas E&P sector from 12 per cent to 18 per cent, with input tax credit (ITC).

 

The higher GST on E&P has primarily been introduced to aid procuring rigs for upstream companies — an essential for oil and gas exploration.

 

The alternative plan would be to introduce a special scheme of incentives for oil companies, the official added.

 

The higher tax levy is set to push up the cost of production for Indian upstream companies, which are grappling with lower energy prices.

 

ONGC could incur an additional input cost of ₹2,500-3,000 crore on account of higher GST, the official said.

 

Amid volatile energy prices, industry leaders say companies involved in cost-intensive sectors such as oil and gas exploration should be assured of certain margins by the government.

 

“The most impacted is the E&P sector and more so when they (companies) carry out deep-water and ultra-deep water exploration. Petrochemical is the other affected sector. I believe for the growth of these two sectors there should be an assured margin, below which if their margins go, there should be some sovereign support,” said Sandeep Gupta, chairman and managing director of GAIL, on September 16 at an industry event.

 

Crude oil prices have slumped to $66-68 a barrel compared to around $75 a barrel last year, on account of over-supply and muted global demand.

 

The price realisation of upstream oil companies has been affected due to lower energy prices.

 

ONGC, India’s largest upstream major, reported a sharp decline of 20 per cent in realisation to $66.13 per barrel in the first quarter of 2025-26 (FY26) on a year-on-year basis.

 

Prashant Vasisht, senior vice-president and co-group head, corporate ratings, Icra, said: “GST on inputs such as right hiring services cannot be offset on the sale of crude oil and natural gas leading to stranded taxes. Accordingly, an increase in GST on E&P from 12 per cent to 18 per cent would increase the input costs for upstream companies.”

 

Meanwhile, the Indian government will soon award blocks under Open Acreage Licensing Policy (OALP) X — the largest bidding round for offshore exploration — entailing 192,000 square km of area, of which 175,000 square km is for offshore areas. 

Why intervention is needed

• Higher GST on exploration and production services will push up cost of production for Indian upstream companies
• They are already dealing with lower energy prices
• Since crude oil and natural gas outside GST purview, stranded taxes will arise if no offset available on the sale of these products