Executive note
India’s oil exploration sector faces a punishing fiscal blow after the GST Council’s decision to raise service taxes from 12% to 18%. The September 2025 hike will saddle upstream companies with billions in additional costs, squeezing ONGC, Oil India, Vedanta and Reliance at a time when commodity price volatility and currency pressures already challenge project economics across the energy sector.
India’s upstream oil and gas industry has absorbed a significant fiscal shock following the Goods and Services Tax (GST) Council’s decision to increase rates on exploration and production services. The tax rate climbs to 18% from 12%, effective September 22, 2025, covering petroleum exploration, mining, drilling, and related support activities across the sector.
Industry estimates suggest the move will substantially increase annual project costs starting in September 2025, tightening margins for state-owned giants such as Oil and Natural Gas Corporation (ONGC) and Oil India, alongside private explorers including Vedanta and Reliance Industries. The burden falls particularly hard because crude oil and natural gas remain outside the GST framework, preventing producers from offsetting higher service taxes through input credits.
Brent crude currently trades around $67 per barrel, having declined from earlier 2024 highs but remaining well above the $60 level suggested in initial reports. This provides some cushion for producers, though commodity price volatility continues to complicate project planning.
ONGC faces the steepest impact given its extensive deep water programme in the Krishna-Godavari Basin and other offshore blocks. The additional tax burden threatens to push project returns below economic thresholds for marginal developments. Oil India’s north-eastern operations, along with specialized projects in coal-bed methane and marginal fields operated by Vedanta and Reliance, confront similar pressures where thin margins offer limited flexibility.
The increased service costs pose particular challenges for mining and natural gas projects, where returns remain uncertain and exploration carries inherent risks. Despite the availability of input tax credits under the new structure, companies face immediate working capital pressures from the higher 18% rate.
Industry bodies have initiated discussions with policymakers regarding transitional relief or alternative tax structures to preserve investment incentives. The petroleum ministry has begun internal consultations on potential mitigation measures, though officials acknowledge that revenue considerations guided the council’s decision.
The timing proves challenging as India seeks to boost domestic energy production to meet rising demand. Coal-bed methane projects, viewed as crucial for diversifying natural gas supply, appear especially vulnerable to delays or cancellations. With project economics under strain, India risks hampering its energy security objectives precisely when global competition for hydrocarbon investment capital has intensified.
The tax increase represents another headwind for an industry already navigating regulatory complexity, environmental compliance costs, and the broader energy transition. For companies with significant exploration portfolios, the cumulative effect of higher service taxes could materially impact investment decisions and development timelines across multiple projects.