Understanding Recent Changes to Goods and Services Tax on Coal and Its Effects

Coal serves as a primary energy source for India's electricity generation and is crucial for sectors like steel and cement. The Goods and Services Tax (GST) Council implemented notable revisions to coal taxation in September 2025. These adjustments are expected to impact coal prices, corporate financial health, and consumer electricity costs. The GST rate for coal has been raised from 5% to 18%. Concurrently, the fixed compensation cess of Rs. 400 per tonne has been eliminated. This shift means that lower-grade coal now incurs a proportionally smaller tax burden. Furthermore, the amendment rectifies the inverted duty structure, facilitating the utilization of input tax credit and improving cash flow for businesses. These changes could also contribute to stabilizing or slightly lowering electricity expenses.

Understanding Goods and Services Tax on Coal

The Goods and Services Tax (GST) applied to coal encompasses taxes on the sale of coal and related fuels throughout India. Before GST implementation, coal pricing incorporated multiple taxes such as excise duty, state VAT, and a clean energy cess. The GST regime streamlined these into a unified national tax.

Until the recent adjustments, coal was subject to a 5% GST rate, in addition to a fixed compensation cess of Rs. 400 per tonne, irrespective of its quality or market value. Effective September 2025, the GST rate has been revised to 18%, and the flat cess has been abolished.

To illustrate the impact, consider a power plant purchasing low-grade coal priced at Rs. 1,200 per tonne prior to these changes:

Under the previous system (5% GST + Rs. 400/tonne cess):

• The GST component amounted to Rs. 60, and the cess was Rs. 400.
• This resulted in a total tax of Rs. 460, equating to an approximate effective tax rate of 38%.

Under the current system (18% GST, no cess):

• The GST component is Rs. 216, with no cess applied.
• The total tax is Rs. 216, leading to an effective tax rate of approximately 18%.

Revised GST Rates for Coal and Related Products

The table below outlines the changes in GST rates for various coal products:

Evolution of Coal Taxation Under GST

Prior to the implementation of GST in 2017, coal prices incorporated excise duty, VAT, and a clean energy cess, leading to a complicated and state-dependent tax structure. While GST initially streamlined this, the flat Rs. 400 cess introduced its own set of challenges.

Earlier GST Framework (2017–2025)

Under this framework:

• The GST rate stood at 5%, supplemented by a Rs. 400 per tonne cess.
• This cess was applied uniformly, irrespective of the coal's cost or quality.
• Consequently, lower-grade coal incurred a disproportionately high tax percentage, diminishing its appeal even for industries capable of utilizing it.

Current GST Framework (Effective September 2025 Onwards)

The updated framework introduces:

• An 18% GST rate, with the removal of the compensation cess.
• Taxation is now levied as a percentage of the coal's total value, ensuring a more equitable approach across different grades.
• This adjustment results in a reduced overall percentage tax burden for industries, such as cement plants and brick kilns, which rely on more affordable coal grades.

Significance of These Revisions

1. Equitable Taxation for Diverse Coal Grades

The elimination of the flat cess ensures that inexpensive coal is no longer subject to an unfairly high tax. This translates to lower per-tonne tax payments for operations like brick kilns and smaller foundries, which depend on more affordable coal varieties.

2. Improved Financial Flexibility for Coal Businesses

Prior to these changes, the 5% GST on coal was considerably lower than the 18% GST on various input services, including machinery maintenance, wagon leasing, and security provisions. This discrepancy often led to an accumulation of unutilized GST credits. The updated coal GST rate now matches input service rates, allowing companies to fully leverage these credits and enhance their working capital.

3. Reduced Costs for Electricity Production

The removal of the cess means power generating facilities now incur lower costs for large-scale coal acquisitions. This reduction in production expenses can potentially help in averting increases in consumer electricity tariffs.

4. Enhanced Competitiveness for Local Coal

Historically, imported premium coal held a price advantage because of the flat cess applied to domestically sourced Indian coal. This policy modification levels the competitive landscape, fostering local mining employment and decreasing dependence on foreign imports.

Comparative Analysis of GST Rate Adjustments on Coal

The following table provides a comparison between the former and current GST frameworks concerning coal:

Anticipated Outcomes

These changes are projected to yield several positive results:

• Coal manufacturers will be able to access previously blocked GST credits.
• Sectors relying on lower-cost coal are expected to experience significant cost savings.
• There is a potential for a minor decrease in electricity costs, particularly from facilities powered by coal.
• An increase in domestic coal utilization (import substitution) is anticipated as Indian coal becomes more competitive.
• Overall compliance will be simplified due to a standardized GST rate applied across the majority of coal varieties.