Image Source: Economic Times
The recent hike in Goods and Services Tax (GST) rates on capital goods used in the oil, gas, and coal bed methane (CBM) sectors has triggered concerns among Indian industry leaders, who warn that the increased tax burden could jeopardize India’s energy security ambitions and undermine efforts to reduce import dependence. The Federation of Indian Chambers of Commerce and Industry (FICCI) highlighted these challenges in a letter addressed to Oil Minister Hardeep Singh Puri, urging reconsideration of the GST increase which raises costs from 12 percent to 18 percent.
Key Highlights: Impact on Upstream Oil and Gas Sector
An 18 percent GST on capital goods raises production costs for exploration, development, and production activities in petroleum and CBM fields, which require substantial risk capital investments.
This hike comes at a time when global crude and natural gas prices have moderated, putting financial pressure on upstream producers through lower realizations and higher operating costs.
The additional GST burden contradicts assurances given in upstream contracts where zero customs duties and taxes on local purchases under deemed exports were promised to ensure fiscal stability.
FICCI underlined that these GST changes do not align with the recently approved Oilfields Regulation and Development Act, which aims to provide fiscal certainty to operators engaged in exploration and production (E&P) activities.
Threat to Energy Independence Goals
India imports approximately 88 percent of its crude oil and roughly half of its natural gas, making self-sufficiency imperative for economic stability.
The government’s strategic roadmap targets increasing domestic natural gas production to 15 percent of the energy mix by 2030 to reduce vulnerability to global supply shocks.
The raised GST rate may deter investments and delay development of certain oil and gas assets due to diminished returns, potentially forcing greater reliance on imports.
FICCI called for tax relief or removal of GST on capital goods in these sectors to stimulate domestic production and keep India’s energy goals on track.
Coal Bed Methane and Market Dynamics
The CBM sector, which has traditionally operated on a revenue-sharing model with no cost recovery, faces heightened production costs due to GST, further stressing operational viability.
The hike could slow CBM exploration and production efforts, affecting India’s diversified fuel mix essential for cleaner and sustainable energy transition.
Calls for Policy Reconsideration and Input Tax Credit Expansion
FICCI advocates a return to a lower or nil GST incidence on capital goods for petroleum and CBM sectors, consistent with contractual commitments to boost investor confidence and sector growth.
The industry body also emphasized the need to cover natural gas fully under GST to permit input tax credits throughout its value chain, thereby reducing cascading taxes and production costs.
In the absence of input credit, higher upstream costs may translate into inflated prices for end consumers, affecting affordability and economic competitiveness.
Broader Economic Implications
The GST rationalization has contrasting effects; while it aims to simplify the tax structure and boost sectors like renewable energy by reducing GST on equipment, it inadvertently burdens the oil and gas upstream segment.
This dichotomy poses challenges as India simultaneously pursues ambitious clean energy goals alongside ensuring energy reliability through fossil fuels.
According to market analysts, the increase in cost of production may impact asset development decisions and slow down capital expenditure in the energy sector.
Conclusion
The GST hike on capital goods used in oil, gas, and CBM sectors poses a potential hurdle to India’s aspirations for energy independence and fiscal stability in exploration and production. Industry advocates urge the government to reconsider the tax rates and expand input credit provisions to sustain domestic production momentum, protect investor sentiment, and secure affordable energy supply for India's growing economy.
Sources: Economic Times, Business Standard, ICRA, FICCI Press Releases
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