GST Council Reforms Coal Tax Structure, Cuts Power Costs and Aids Producers

The 56th meeting of the GST Council, held in New Delhi, has introduced sweeping reforms to the taxation of coal, with measures aimed at rationalizing tax burdens, cutting power costs, reducing distortions, and boosting self-reliance in India’s energy sector. The Council’s recommendations mark one of the most significant changes to coal taxation since the introduction of the GST regime.

Key Decisions: Removal of Cess and GST Rate Hike

Previously, coal attracted 5% GST plus a flat compensation cess of ₹400 per tonne. The Council has now removed the compensation cess and raised the GST rate on coal from 5% to 18%.

While the GST hike may appear steep, the overall outcome is a net reduction in tax incidence for many coal grades, particularly those used in power generation.

Lower Tax Burden on Power Sector

The reforms have slashed the tax burden on coal grades G6 to G17, reducing overall taxes by ₹13.40 per tonne to ₹329.61 per tonne. For the power sector, this translates into an average tax reduction of ₹260 per tonne, which will cut electricity generation costs by 17 to 18 paise per kWh.

This is expected to relieve financial pressure on power producers, ultimately benefitting end consumers by keeping tariffs stable and improving affordability of electricity.

Rationalization of Tax Burden Across Coal Grades

Under the earlier structure, the flat cess disproportionately penalized low-quality, low-priced coal. For instance:

• G-11 non-coking coal (the majority of Coal India Limited’s production) carried a 65.85% tax incidence,

• while G-2 higher-grade coal had a tax incidence of 35.64%.

The reforms now standardize tax incidence across all categories of coal at a uniform 39.81%, ensuring fairness in taxation and removing distortions that hurt domestic coal usage.

Boosting Aatmanirbhar Bharat Through Import Substitution

One of the major impacts of the reform will be on import substitution. Earlier, because of the flat cess, imported high-grade coal landed at a lower cost compared to Indian low-grade coal, placing domestic production at a disadvantage.

The removal of the cess creates a level playing field between imported and domestic coal, strengthening the government’s Aatmanirbhar Bharat vision, and reducing dependency on foreign coal supplies.

Correcting the Inverted Duty Structure

Another critical reform is the removal of the inverted duty anomaly. Previously, coal companies paid 5% GST on output, but most of their input services attracted 18% GST. This mismatch meant that large sums of input tax credit remained unutilized, blocking liquidity for coal producers.

With the GST rate on coal now raised to 18%, companies can fully utilize their input tax credits, releasing blocked funds and improving cash flows. This will also prevent accounting losses associated with mounting unused credits.

Consumer-Friendly Despite Higher GST Rate

Despite raising the GST rate from 5% to 18%, consumers are expected to face lower overall costs, thanks to the elimination of the compensation cess. By reducing distortions, ensuring better liquidity for coal producers, and cutting generation costs, the reforms strike a balance between the interests of industry and households.

A Win-Win Reform for Producers and Consumers

The Council’s decisions are expected to:

• Reduce electricity generation costs, benefiting consumers.

• Level the tax burden across coal grades, making taxation more equitable.

• Promote domestic coal over imports, aligning with self-reliance goals.

• Release blocked liquidity for coal producers, improving financial health.

• Correct long-standing anomalies in GST credit utilization.

These reforms not only rationalize coal taxation but also represent a structural improvement in India’s energy policy framework. By balancing fiscal stability with industry needs and consumer welfare, the GST Council has introduced a comprehensive reform that benefits the entire value chain—from producers to households.