The Impact of GST on the Upstream Oil and Gas Industry

Introduction

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The Goods and Services Tax (GST) is a major reform in India's taxation system, aiming to create a unified national market. However, the impact of GST on the upstream oil and gas industry is a significant concern. This article delves into the intricacies of GST's effect on the exploration and production (EP) sector, defining the terms and outlining the specific implications.

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Understanding the Upstream Oil and Gas Sector

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Before we explore the impact of GST, it's crucial to understand the upstream oil and gas industry. This sector is primarily concerned with the exploration and production of crude oil and natural gas. It comprises the activities of searching for underground or underwater resources, drilling exploratory wells, and the subsequent drilling and operation of wells that bring the crude oil or raw natural gas to the surface. Key aspects include:

r r Explorationr Drillingr Productionr Transportation of extracted resources to the surfacer r

This sector is fundamental to the entire oil and gas value chain, playing a critical role in energy security and economic development.

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Exclusion and Inclusion under GST

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The Goods and Services Tax Act, 2017 does not include several petroleum products in its ambit, specifically crude oil, natural gas, petrol, diesel, and jet fuel. However, other oil products such as kerosene, liquefied petroleum gas (LPG), and naphtha are included. This exclusion causes a unique set of challenges for the upstream oil and gas industry. The implications are two-fold:

r r Double Taxation: Oil companies operating in this sector will have to comply with both the old and new tax regimes, leading to potential double taxation.r Input Tax Credit (ITC) Challenges: An oil producer can only claim input tax credit (ITC) on inputs like machinery and fuels when these are under the GST ambit. Despite the higher efficiency and cost savings associated with ITC, the exclusion of core petroleum products under GST means that ITC cannot be claimed for most of them.r r r

Absence of GST on Key Petroleum Products

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Several key petroleum products, including crude oil, natural gas, high-speed diesel, motor spirit, and automotive fuel (ATF), are exempt from GST. This has significant implications for the exploration and production sector:

r r Cost Structure: The majority of GST paid on goods and services by upstream companies will be a cost. Procurement of inputs and services is subject to GST, while the majority of the output remains outside the GST ambit. This results in an increased cost structure for the industry.r Revenue Impact: The core products of the EP sector, such as crude oil and natural gas, continue to attract existing levies. However, costs associated with exploration and production activities, which are essential for these core products, are subject to GST.r r r

Conclusion

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Given the current state of affairs, the exploration and production (EP) sector of the oil and gas industry will face adverse effects due to the implementation of GST. While the majority of upstream activities that contribute to the production of core products (crude oil and natural gas) are not affected by GST, the procurement of necessary inputs and services is subject to GST. This transitional phase is expected to create operational and financial challenges for companies in this sector.

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Overall, the GST reform presents a complex and multifaceted challenge for the upstream oil and gas industry. As the sector navigates these changes, it must adapt and find ways to mitigate the increased costs and potential regulatory complexities introduced by the new tax regime.