Taxability of Cost Petroleum and Profit Petroleum under GST

What is Cost Petroleum and Profit Petroleum?

An Oil Exploration and Production contractor (hereinafter referred to as contractor) applies for a license/lease to explore/mine the petroleum crude and/or Natural Gas from the Government. If the contractor gets a license/lease then the contractor will enter into a contract with the Government and such a contract is called Production Sharing Contract (hereinafter referred to as contract). As per this contract, the contract shall have exclusive right to carry out Petroleum Operations to recover costs and expenses as provided in the contract

As per the Productions Sharing Contract, when the contractor discovers oil/gas, he is entitled to recover all of his contract costs from the sale proceeds. Contract Cost includes expenses incurred in exploration, development, production, and payment of royalty. After all his costs are met, he has shared his profit from the venture with the Government as per the contract.

The value of petroleum which the contractor is entitled to take in a year for recovery of those contract costs is called "Cost Petroleum" The remaining value is known as "Profit Petroleum"

Taxability of Cost Petroleum:

Cost Petroleum is not a consideration paid by the contractor for the services provided by the Government. It is done by the contractor himself at his own risk, cost, and expense. So, it is not treated as supply as there is no consideration and the same was not specified in Schedule 1. So,  it is not taxable under GST. The same was clarified with the circular 32/06/2018 dt. 12/02/2018.

Taxability of Profit Petroleum:

Profit Petroleum is a value of petroleum in which the Government has a share and the licensee/lessee has to pay the same to the Government. Here, it can be treated as the consideration paid by the contractor for the services(service of license/lease) provided by the Government. So, the same is treated as supply under GST. However, it is exempted from GST via notification no. 5/2018 CT(R) dated 25.01.2018 for intra-state supply and notification no. 5/2018 IT(R) dated 25.01.2018