Crude at $100: The Dual Crisis of OMC Under-Recoveries and the Cascading Tax Burden on India’s Energy Sector

The sudden escalation of geopolitical tensions between the United States and Iran has sent shockwaves through global energy markets, pushing the benchmark Brent crude past the critical $100 per barrel mark. For India, a nation heavily dependent on energy imports, this price surge is more than a macroeconomic challenge—it is a fiscal emergency. India’s state-owned Oil Marketing Companies (OMCs) are currently bearing the brunt of this shock, absorbing massive marketing losses as retail fuel pump prices remain frozen.

According to recent industry data, OMCs are losing an estimated ₹5 per litre on petrol and a staggering ₹23 per litre on diesel. Prior to the onset of the conflict at the end of February, Brent crude prices hovered comfortably around the $70-75 per barrel range. With the Indian crude basket now averaging approximately $109 per barrel, the financial health of domestic refiners is deteriorating rapidly. While the government did implement cumulative retail hikes in May—raising petrol by ₹7.35 per litre and diesel by ₹7.53 per litre across four instalments—these adjustments have proven entirely insufficient against the current triple-digit crude reality.

The Tax and GST Conundrum: Why the Energy Sector Bears a Double Burden

While the operational losses of ₹5 and ₹23 per litre paint a grim picture, the structural tax framework in India significantly exacerbates the financial strain on OMCs. At the heart of this issue is the continued exclusion of key petroleum products—including crude oil, petrol, diesel, aviation turbine fuel, and natural gas—from the Goods and Services Tax (GST) regime. Instead, these products remain subject to legacy tax structures, namely Central Excise Duty and State Value Added Tax (VAT).

This exclusion creates a severe bottleneck regarding Input Tax Credit (ITC). OMCs pay standard GST on their capital acquisitions, operational services, pipeline transportation, and logistics. However, because their final outputs (petrol and diesel) are outside the GST net, OMCs cannot claim ITC to offset the GST paid on these inputs. This “blocked ITC” represents a direct, unrecoverable cost that is absorbed into their balance sheets, further widening the negative marketing margins. To understand the deeper mechanics of this fiscal friction, analyzing how crude oil prices and their tax implications affect the broader energy sector is essential.

Furthermore, the cascading tax effect does not stop at the refinery gates. Downstream industries—ranging from manufacturing to logistics—rely heavily on diesel. Because they cannot claim GST input credits on the fuel they consume, their operational costs rise in tandem with crude prices. This lack of tax fungibility triggers inflationary pressures across the entire supply chain, which we explore in detail in our analysis of cascading tax impacts on downstream sectors during crude spikes.

LPG Under-Recoveries and the Fiscal Deficit Threat

The financial bleeding is not confined to transport fuels. According to ratings agency Icra, under-recoveries on domestic liquefied petroleum gas (LPG) have reached ₹200 per cylinder. Under-recoveries of this magnitude present a direct challenge to the union budget. Historically, the central government has had to step in with fiscal subsidies to shield consumers from the full impact of global price spikes.

These subsidies disrupt the government’s fiscal deficit targets. If the government chooses to absorb the under-recoveries, it must divert funds from capital expenditure or increase borrowing. On the other hand, if the government attempts to offset these losses by adjusting excise duties, it directly impacts tax collections. This delicate balancing act highlights the systemic vulnerability of India’s energy pricing mechanism. The compliance and revenue leakage issues associated with subsidized fuels are discussed further in our study on under-recoveries in the domestic LPG segment.

Import Bills and Supply Chain Compliance Challenges

The physical realities of India’s energy consumption make these price levels highly unsustainable. India imports nearly 90 percent of its crude oil and 50 percent of its natural gas requirements. Data from the oil ministry’s Petroleum Planning and Analysis Cell (PPAC) reveals that India’s crude oil import bill surged by 56.5 percent to $63.4 billion during the first four months (April-July) of the current financial year (2026-27).

Remarkably, this massive spike in expenditure occurred despite import volumes remaining virtually flat—81.9 million tonnes (mt) in the April-July period of FY27 compared to 81.5 mt in the corresponding period of the previous year. Meanwhile, the net oil and gas import bill rose by 40.3 percent to $57.8 billion. This stark divergence highlights how price volatility, rather than consumption growth, is driving the outflow of foreign exchange reserves.

To mitigate these risks and maintain supply security, Indian refiners are deepening diversification efforts. There is an increasing reliance on crude imports from Russia, Brazil, and select African nations. However, shifting supply chains introduces complex regulatory, customs, and compliance hurdles. Navigating international sanctions, freight insurance compliance, and shipping channel disruptions require robust corporate governance, a theme closely linked to our analysis of geopolitical disruptions and customs compliance.

Conclusion: The Case for Structural Tax Reform

The current crisis serves as a stark reminder of the vulnerabilities embedded in India’s energy pricing and taxation models. As long as petroleum products remain outside the GST framework, OMCs will continue to face the double whammy of frozen retail prices and unrecoverable input tax costs. While diversifying import sources and managing short-term fiscal buffers can provide temporary relief, long-term stability will require bringing petroleum under the unified GST net to eliminate the cascading tax burden and rationalize compliance across the energy supply chain.

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