The increase in the GST on oil and gas EDP (exploration, development, and production) contracts from 12% to 18% could hit upstream operations by inflating production costs and creating stranded taxes, analysts feel. The higher tax has come at a time when realisations of oil producers have weakened due to global market pressures.
However, while GST on coal has been hiked from 5% to 18%, this will be more than offset by the removal of compensation cess component (national calamity contingent duty) on the fuel. The move will lower costs of thermal power business, particularly for plants utilising domestic coal, and may result in tariff reliefs to the consumers. Given the recent policy thrust to coal-based thermal power, and a pick up in investments in the sector after a long lull, the tax relief is aptly timed, analysts reckon.
GST hike poses challenge for upstream oil & gas
“An increased GST on oil & gas EDP contracts would lead to an increase in the cost of production of crude oil and natural gas, particularly since the two items are outside the purview of GST. An increase in the cost of production without an offset available on sale of these products will lead to stranded taxes,” said Prashant Vasisht, Senior Vice President and Co-Group Head, Corporate Ratings, ICRA said.Vasisht pointed out that moderating realisations and increase in cost of production would be a double whammy for the upstream industry and could lead to some assets not being developed on account of poor returns.
The country is dependent on over 85% of its crude oil requirements and 50% of natural gas needs. At a time when the government is pushing for increased thrust to domestic oil production amid global uncertainties, the hike in GST poses a fresh challenge.
GST on coal to bring relief to power sector
“In the thermal business, particularly where plants utilise domestic coal, the rationalised GST (removal of compensation cess) will help lower fuel costs, thereby reducing the cost of thermal power. This will help to reduce the cost of base load for the country and would also help to improve the financial health of distribution companies,” said Sharad Mahendra, Joint MD & CEO of JSW Energy.
Currently, coal attracts 5% GST with an additional cess of Rs 400/tonne. The GST Council has recommended to end compensation cess and hence the rate has been merged with GST. “There is no additional burden,” the government said.
The overall impact on coal companies and consumers, will however, depend on the price and grade of coal.
“The removal of the fixed compensation cess offsets the GST hike for low-priced coal, reducing tax costs, while for higher-priced coal, the GST increase dominates, causing a moderate rise in tax outflow,” said Jimit Devani, Partner, Deloitte India. He added that coal companies and downstream industries will feel this mixed impact, with potential pricing adjustments and pass-through effects depending on coal grade and usage.
For low-priced coal (e.g., ₹1,500 per tonne), the removal of the ₹400 cess significantly reduces the total tax burden. Although GST has increased, the cess removal more than compensates for this, leading to a net decrease in tax outflow by approximately ₹205 per tonne, as per Deloitte. This effectively lowers the cost for coal producers and end-users reliant on low-grade coal.
For high-priced coal (e.g., ₹5,000 per tonne), the scenario is different. The GST increase results in an additional tax outflow of ₹650 (from ₹250 to ₹900), while cess removal saves ₹400 per tonne. This results in a net increase in tax burden of around ₹250 per tonne, representing a moderate increase in costs for coal producers and consumers dealing with higher-grade coal.