New Delhi: The GST Council has approved an increase in the tax on oil and gas exploration and production services from 12% to 18%, a move set to raise production costs across the sector. The new tax rates will come into effect from September 22, 2025.

According to an official statement, services related to the exploration, mining, or drilling of petroleum crude or natural gas, as well as support services for these activities, will now attract an 18% GST with input tax credit (ITC).

Industry experts have expressed concern over the impact of this hike. Prashant Vasisht, Senior Vice President and Co-Group Head, Corporate Ratings at ICRA Ltd., stated that while crude oil and natural gas are outside the GST framework, an increase in production costs without offsetting benefits on sales could result in stranded taxes. “With oil and gas prices having moderated significantly since April 2025 due to global economic pressures and the unwinding of OPEC+ production cuts, the realisations of upstream companies have declined. The GST hike will further increase production costs, potentially making some projects unviable,” he added.

Dhaval Popat from Choice Institutional Equities noted that the GST increase will elevate operational expenses and compress corporate margins. He highlighted that higher taxes could make exploration and production (E&P) projects, especially coal-bed methane (CBM) initiatives, less competitive, potentially affecting efforts to enhance domestic production and reduce reliance on imports.

The sector now faces a dual challenge of moderated revenues and increased production costs, which may impact future investments in exploration and domestic energy output.