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GST Hike Increases Oil and Gas Exploration Costs Significantly

Oil and Gas

BusinessHonor - GST Hike Raises Oil & Gas Exploration Costs

Business Honor
09 September, 2025

GST on oil and gas services rose to 18%, increasing production costs and industry strain.

Starting September 22, the cost of oil and gas exploration in India is set to rise. The GST Council has decided to increase the Goods and Services Tax (GST) on services related to oil and gas exploration, mining, and drilling from 12% to 18%. All services related to the exploration or extraction of natural gas and petroleum crude are subject to this tax increase. Support services for these activities will also see the same increase. Importantly, companies will still be allowed to claim input tax credit (ITC) under the new rate.

Experts caution that this action may result in higher natural gas and crude oil production costs. Since oil and gas themselves are not currently covered under the GST system, companies cannot recover these additional taxes when selling their products. As a result, these extra costs will add up, possibly leading to "stranded" taxes. According to Prashant Vasisht, Senior VP at ICRA Ratings, this shift may have a significant impact on the upstream oil and gas industry. With global prices already lower since April 2025 due to economic challenges and OPEC+ increasing supply, companies are earning less. Now, with rising production costs, many projects may no longer be financially viable.

Dhaval Popat from Choice Institutional Equities added that the GST increase will squeeze profit margins and raise the cost of operations. Projects like coal-bed methane (CBM) could become less competitive; making it harder for India to boost its domestic energy output and reduces reliance on imports. This tax revision is part of broader GST reforms aimed at restructuring tax slabs, but the impact on the energy sector could be significant.