Petroleum products are outside the coverage of GST. Consequently, these products suffer non-creditable GST and other costs/taxes on their procurement which leads to a cascading effect. Exacerbating the issue is the fact that the burden of such non-creditable taxes is solely borne by the oil and gas industry. Additionally, petroleum companies, which are already burdened with domestic taxes are mandated to sell oil and gas at internationally benchmarked prices. For the last 5 years, it has been the persistent request of the oil and gas industry to be included within the fold of GST, however, despite assurances and a clear legislative mandate, the request is yet to be acceded to.
The Competing Entries
The burden on the oil and gas industry is especially heavy given these high taxes combined with high costs of operations. Being a specialized sector, the oil and gas industry is highly dependent on a host of supplies of complex services and critical equipment by various vendors to support the petroleum operations, on the procurement side. Till 2019, technical construction/installation services were generally classified under heading 9954 (entry no. 3) of the Rate Notification as “Construction services” and was taxable at the rate of 18%. The relevant entry read:
|S.No.||Chapter, Section or Heading||Description of Service||Rate|
|3.||Heading 9954 (Construction services)||(ii) composite supply of works contract as defined in clause 119 of section 2 of Central Goods and Services Tax Act, 2017.||18|
In 2019, to soften the blow from such cascading of taxes, vide Notification No. 19/2019 – Integrated Tax (Rate) (dated 30.09.2019 and effective from 01.10.2019), it was provided in the entry no. 24 (ii) that support services to exploration, mining or drilling of petroleum crude and/or natural gas will attract GST under the lower tax slab of 12%:
|S.No.||Chapter, Section or Heading||Description of Service||Rate|
|24||Heading 9986 (Support services to agriculture, forestry, fishing, mining and utilities||(i)…
(ii) Support services to exploration, mining or drilling of petroleum crude or natural gas or both.
Interpretation of Support Services
The terms “support service”, “exploration”, “mining” and “drilling” respectively used in the entry are not defined in the Central Goods and Services Tax Act, 2017 (“CGST Act”) and the rules made thereunder. The term “support services” was, however, defined under the erstwhile Finance Act, 1994 to mean as under:
“infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis.”
As is evident from the above, support services cover a wide range of business activities. In the service tax regime as well, the entry has been given a wide interpretation by various courts. A look at the dictionary meanings of the word “support” also suggests something which helps in sustenance or enables something to continue it to keep going. Accordingly, in the context of oil and gas industry, support services should be given its natural/basic meaning. It should include all incidental activities including site surveys, detail engineering, pipeline laying, insulation, facilities construction, removal and disposal of existing facilities, etc. One could conclude that ancillary activities carried to support the stages of exploration, mining or drilling would find coverage as support services.
This understanding is also bolstered by the scope of the classification entries mentioned under the Explanatory Notes to the Scheme of Classification of Services. In case of heading 998621, the Explanatory Notes succinctly describes that the support services “includes” services of derrick erection, repair, dismantling, well casting, cementing, pumping, fire extinguishing services, etc. The relevant extract of the Explanatory Notes reads as:
Support services to oil and gas extraction
|“This service code includes derrick erection, repair and dismantling services; well casing, cementing, pumping, plugging and abandoning of wells; test drilling and exploration services in connection with petroleum and gas extraction; specialized fire extinguishing services; operation of oil or gas extraction unit on a fee or contract basis.
This service code does not include:
– geological, geophysical and related prospecting and consulting services, cf. 998341”.
It is a settled rule that the term “includes” accords a wide connotation, thereby extending the scope of heading. Employment of the term “includes” in the heading means that the activities listed there are merely indicative and would cover other services which were of similar nature or like. The said position is supported by the Interpretative Rules for the Explanatory Notes under the U.N. Central Product Classification, which explains the non-exhaustive nature of the list of services mentioned therein in the following words:
“62. It should be noted that the explanatory notes are not intended to present an exhaustive list of all the products under each heading; they should be regarded only as lists of examples to illustrate the subclass content”
Therefore, as mentioned earlier, for the oil and gas industry, the scope of the term “support services” is very wide and covers almost all the essential activities which are carried out to aid the petroleum operations related to exploration, mining or drilling of crude oil and natural gas. In fact, the CBIC seems to have fully endorsed this interpretation of wide coverage to the entry. Vide Circular No. 114/33/2019-GST dated 11.10.2019, the CBIC has clarified that “most of the activities associated with the exploration, mining or drilling of petroleum crude or natural gas fall under heading 9986.
The Contrary Approach by the Tax Authorities
Unfortunately, despite the unencumbered coverage of the entry of “support services”, the tax authorities seem to have taken a narrower approach. There are instances where tax authorities have sought to obviate the scope of entry for support services required for petroleum operations and intend to classify the support services in the residuary entry for construction services, which are generally chargeable to 18% GST.
For instance, the authorities try to disassociate most services as a support activity for petroleum operations, on the premise that since the services involve civil work along with supply of goods, they take the shape of works contract ought to be classified in the residuary entry to heading 9954 which is taxable at 18% GST. The Rajasthan AAR in Petrofac International (UAE) LLC, has taken a similar view and it has inter alia held that services of works contract for creating the infrastructure would not qualify as support services as they are rendered before creating the facility. The ruling observed that “support services” shall include services to be provided for exploration, after building of necessary infrastructure/facility which is ready to start exploration. The relevant extract from the ruling reads thus:
“5. From the explanatory note it reveals that Support Services shall include the services to be provided for exploration, once the infrastructure/facility for exploration is built & complete in all respect and ready to start exploration. But it does not include the services to be provided before creating the infrastructure/facility. Under the EPC contract the applicant has to undertake activities from site survey, Designing, Engineering, Procurement, construction of customised facility, commissioning of permanent facility, Test run and hand over of complete facility so designed, constructed, tested & commissioned. Thus it cannot be treated as support services to oil & gas extraction.”
This approach appears to be directly opposed to the cardinal rule of interpretation of competing entries wherein it has been held that for purposes of classification the entry with specific description would prevail over an entry with a general description. The fact that the services are in nature of a composite supply of works contract service, should not hinder the classification as support services under heading 998621- which is a specific entry for activities that aid oil and gas extraction. Even by application of Rule 3(c) of the General Rules of Interpretation under the Customs Tariff Act, 1975, heading 9986 which appears later in the numerical order to heading 9954 should be adopted.
The oil and gas sector is one of the most capital-intensive sectors. It is also a sector which is regulated by the government whose adverted policy is to ensure optimal exploration at competitive costs. It is perhaps being aware of these high costs that the Government had particularly carved out the specific entry no. 24 for the support services required in exploration, mining or drilling of oil and gas, and had consciously set out a benign rate of 12% instead of the usual rate of 18%. It is unfortunate that the tax authorities at the ground level are taking a contrary position. For a sector which ideally satisfies all requirements to be in GST and ironically remains excluded, such approach by tax authorities leads to a double whammy.
Hence, the need of the hour is for the Government to step-in and issue a comprehensive circular regarding the scope and coverage of support services.
The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein
 Section 9(2) of the CGST Act
 Notification No. 8/2017 – Integrated Tax (Rate) dated 28.06.2017
 This entry was omitted vide Notification No. 03/2019-Integrated Tax (Rate) dated 29.03.2019 w.e.f. 01.04.2019. Presently, similar construction/installation services are asserted to be classifiable under the residuary entry which reads as “(xii) Construction services other than (i), (ia), (ib), (ic), (id), (ie), (if), (vii), (viii), (x) and (xi) above”. The residuary entry provides for the usual taxable rate of 18%.
 Shoppers Stop Ltd. v. CST [2018 (8) GSTL 405 (Tri.-Mumbai), Tulip Global Pvt. Ltd. v. CCE [2019(28) GSTL 270 (Tri.-Del.)] maintained in 2020 (33) GSTL J94 (Supreme Court).
 Shorter Oxford English Dictionary Fifth Edition, Volume2; The New International Webster’s Comprehensive Dictionary Encyclopedic Edition, 2003; Black’s Law Dictionary Tenth Edition
 Tetragon Chemie Private Limited and Ors v. CCE and Ors [2001 (138) ELT 0414 Tri-LB], StoveKraft Pvt. Ltd. v. State of Karnataka [2006(2) TMI 603], Bharat Coop. Bank (Mumbai) Ltd v. Coop Bank Employees Union [2007(4) SCC 685], Regional Director Employees’s State Insurance Corporation v. High Land Coffee Works of Pfx. Saldanha & Sons [1991(7) TMI 367]
 Advance Ruling No. RAJ/AAR/2021-22/17 dated 13.09.2021. Against the said ruling, an appeal before the AAAR is pending.
 Ascent Meditech Ltd. v. CCE, Vapi [2014 (309) E.L.T. 712 (Tri. – Ahmd.)] [Affirmed in 2015 (320) ELT A281 (Supreme Court)], Pepsico India Holdings Pvt. Ltd. v. Dy. Commercial (A) IV, Commercial Taxes, Jaipur [2018(16) G.S.T.L. 249 (Raj.)], Dabur India Ltd. v. CCGST [2020(34) G.S.T.L. 9(All.)], Sanwar Agarwal v. Commissioner of Customs (Port) [2016 (336) E.L.T. 42 (Cal.)]