India’s estimated $433.8 billion oil and gas industry is seeking targeted tax relief in the Union Budget 2026-27 to encourage domestic exploration and compensate for under-recoveries incurred from the sale of subsidised cooking fuel.
A key demand from the sector is the inclusion of crude oil and natural gas under the Goods and Services Tax (GST) at the lower 5% slab. Industry stakeholders believe that a simplified taxation structure would reduce the overall tax burden, improve ease of doing business, and attract fresh investments.
Industry Calls for GST Rationalisation
While deregulation and tax optimisation have been central to recent economic reforms, the industry has flagged concerns over recent GST changes. Although the Oilfields (Regulation and Development) Amendment Bill was seen as a positive step toward deregulating the upstream sector, the latest round of GST rationalisation increased GST rates on oilfield equipment and services from 12% to 18%, creating additional cost pressures.
“We remain hopeful that GST rates will be reduced to 5%, along with the inclusion of petroleum products, especially natural gas and aviation turbine fuel (ATF), within the GST framework,” a tax expert said.
LPG Under-Recoveries and Compensation Demand
According to another tax expert quoted by ICRA, oil marketing companies (OMCs) may seek compensation from the government for under-recoveries on the sale of liquefied petroleum gas (LPG) ahead of the budget.
As per ICRA’s estimates, net under-recoveries on domestic LPG sales, after accounting for the one-time government grant announced in August 2025, are expected to remain around ₹30,000 crore.
Push for Infrastructure Status for Natural Gas
The sector is also hopeful that natural gas will be granted infrastructure status, a long-standing demand that could improve access to financing and credit.
“Granting infrastructure status to the petroleum industry would significantly improve financing conditions, which remain a key challenge,” the expert noted.
He added that the government could consider creating a petroleum financing fund, similar to those in shipbuilding and renewable energy. Such a fund could be supported by revenues from the oil cess development fund and used to invest in new exploration projects across both the public and private sectors.
Upstream Sector Seeks Cess and Tax Relief
India’s upstream oil and gas sector is calling for a reduction in cess on crude oil, restoration of tax holidays for new exploration blocks, and GST exemption for exploration activities.
Currently, the upstream sector operates under multiple contractual regimes, including nomination, pre-NELP, NELP, and HELP, each with different royalty and cess provisions. Industry stakeholders believe that harmonising royalty and cess structures across all regimes would ensure a level playing field, reduce compliance complexity, and promote equitable investment opportunities.
Support for Gas-Based Economy and Midstream Reforms
As the government continues to push toward a gas-based economy, stakeholders expect further policy support to increase the share of natural gas in India’s energy mix.
The industry is seeking lower GST rates or exemptions for pipeline construction materials, compressed natural gas (CNG), and biogas. The midstream segment has also requested the removal of the 2.5% customs duty on LNG imports to make natural gas more affordable and widely used.
Industry players further want natural gas and petroleum products brought under GST to enable seamless input tax credits and prevent stranded taxes.
Conclusion: Reducing Import Dependence
With India importing over 80% of its crude oil needs, the oil and gas sector sees the Budget 2026-27 as a critical opportunity to address long-standing fiscal and regulatory challenges. Industry stakeholders believe that GST inclusion, cess rationalisation, infrastructure status for natural gas, and compensation for LPG under-recoveries could unlock fresh investments, strengthen domestic production, and support the government’s broader push toward a gas-based economy.
Source: MoneyControl