OPINION | Industry seeks tax, GST and duty reforms across oil and gas

tax

The active management of production and supplies by OPEC+ has supported crude oil prices, which are currently at levels of approximately USD 60–61 per barrel at the beginning of January 2026. At higher crude oil prices, the ad valorem cess of 20% limits the realisations and cash accruals of upstream companies compared to the earlier fixed cess per metric tonne. Therefore, a downward revision in the cess on crude oil production from the current level may help upstream companies improve their earnings in a higher crude oil price regime.

In addition to cess, the National Calamity Contingent Duty (NCCD) of ₹50 per metric tonne on crude oil imports was introduced in 2003 for a period of one year; however, it has remained in force since then. The industry has been seeking a review of this levy.

GST, Service Tax and Tax Demands

One of the prominent demands of the upstream industry is the GST exemption for exploration and development activities. Further, the industry seeks removal of service tax on cost petroleum (which can be enumerated), profit petroleum and royalty, as these are not payments against any service and therefore should not be subject to service tax.

Earlier, the Government had incentivised the upstream industry through a seven-year tax holiday under Section 80-IB(9), which was available for undertakings that commenced commercial production up to 1 April 2017. The industry is seeking restoration of these tax holidays for new blocks.

Royalty Structure and Capital Expenditure Incentives

At present, royalty on production from nomination blocks is levied at 20% of the wellhead price for onshore areas. The upstream industry has been seeking a tapering of this rate to 12.5%, which is equal to the rate applicable to crude oil produced from blocks under the New Exploration Licensing Policy (NELP).

In the past, the Government incentivised the oil and gas industry by allowing a 15% deduction under Section 32AC on capital expenditure incurred on plant and machinery. This benefit was discontinued for new investments made after 1 April 2017. As refineries undertake substantial capital expenditure for capacity augmentation and upgradation, the industry has been requesting restoration of the deduction under Section 32AC.

GST and Excise Issues in Gas, Pipelines and Biofuels

Goods and services procured for the construction of petroleum and natural gas pipelines—such as pipes, gas compressors and works contract services—are not eligible for input tax credit (ITC), while attracting GST of up to 18%. This significantly increases project costs. The industry has requested that GST on such goods and services be exempted or levied at a concessional rate of 5%.

Currently, Central Excise Duty is applicable on compressed natural gas (CNG), in addition to GST on the process of compression of natural gas into CNG. To avoid double taxation and promote the use of natural gas, the industry seeks exemption of CNG from Central Excise Duty and/or GST.

Further, when compressed biogas (CBG) is blended with natural gas, it attracts Excise Duty and VAT applicable to CNG but does not enjoy the benefit of ITC on GST paid for procurement of biogas/CBG. This results in a significantly higher tax incidence. The industry has therefore requested full exemption of biogas/CBG, when blended with CNG, from Central Excise Duty.

Natural Gas Transportation, Imports and Refinery Operations

The GST rate on services relating to transportation of natural gas through pipelines is currently 18% with ITC or 5% without ITC. The industry has proposed that GST at 5% with ITC benefit be made applicable to reduce transportation costs and promote cleaner energy. Additionally, to encourage the use of natural gas as fuel, liquefied natural gas (LNG) imports should be exempted from customs duty, as crude oil attracts nil duty while LNG currently attracts 2.5%.

Intermediate products such as reformate, LGO, VGO and naphtha are exchanged among refineries to ensure optimal utilisation of secondary processing units. These streams are subject to GST at 18%, but as they are used in the manufacture of non-GST goods, ITC is not available to the receiving refinery. The industry has requested removal of GST on such inter-refinery supplies or reduction to a nominal rate of 0.1%.

Additionally, the industry has been demanding the imposition of anti-dumping duties on several products and petrochemicals, such as bitumen and iso-nonyl alcohol, to curb dumping. In view of the significant increase in base oil imports in recent years, the industry has also sought an increase in customs duty on base oils from the current 5.5% to encourage domestic production.

Finally, the industry continues to advocate for inclusion of natural gas and petroleum products under the GST regime to enable seamless flow of input tax credits and eliminate stranded taxes.

(Prashant Vasisht, SVP and Co-Head Corporate Ratings, ICRA Ltd.)

Views are personal, and do not represent the stance of this publication.