GST Reforms Rationalise Coal Tax, Ease Costs for Power Sector

15 Sep 2025 CW Team

These reforms reduce the overall tax burden on coal grades G6 to G17, ranging from Rs 13.40 per tonne to Rs 329.61 per tonne. For the power sector, the average reduction is Rs 260 per tonne, lowering the cost of generation by 17 to 18 paise per kWh.

The changes also rationalise tax incidence relative to coal quality. Earlier, the flat Rs 400 per tonne cess disproportionately affected low-quality and low-priced coal. For example, G11 non-coking coal, the main output of Coal India Limited, faced a tax incidence of around 65.85 per cent, compared with 35.64 per cent for G2 coal. With the cess removed, tax incidence across all coal categories is now uniform at 39.81 per cent.

The reforms further support India’s Aatmanirbhar Bharat initiative by encouraging import substitution. Previously, high-calorific-value imported coal was cheaper than domestic low-grade coal due to the flat cess, placing Indian coal at a disadvantage. Removal of the cess levels the playing field, strengthening self-reliance and reducing unnecessary imports.

Additionally, the reforms correct the inverted duty anomaly. Coal earlier attracted 5 per cent GST, while input services used by coal companies faced higher GST rates, typically 18 per cent. This mismatch resulted in substantial unutilised tax credit on the books of coal companies. The new measures allow companies to utilise these credits against GST liabilities, releasing blocked liquidity and reducing accounting losses.

Despite raising GST rates from 5 per cent to 18 per cent, overall tax incidence on the final consumer is lower due to the removal of the compensation cess. Rationalisation of duty, elimination of the inverted structure, and release of blocked liquidity will benefit coal producers and consumers alike.

The GST Council’s decisions mark a balanced reform aimed at boosting the coal sector while supporting power generation and national self-reliance.

The 56th GST Council meeting in New Delhi has introduced major changes to coal taxation. Previously, coal attracted 5 per cent GST along with a compensation cess of Rs 400 per tonne. The Council has now recommended removing the GST compensation cess and increasing the GST rate on coal from 5 per cent to 18 per cent.These reforms reduce the overall tax burden on coal grades G6 to G17, ranging from Rs 13.40 per tonne to Rs 329.61 per tonne. For the power sector, the average reduction is Rs 260 per tonne, lowering the cost of generation by 17 to 18 paise per kWh.The changes also rationalise tax incidence relative to coal quality. Earlier, the flat Rs 400 per tonne cess disproportionately affected low-quality and low-priced coal. For example, G11 non-coking coal, the main output of Coal India Limited, faced a tax incidence of around 65.85 per cent, compared with 35.64 per cent for G2 coal. With the cess removed, tax incidence across all coal categories is now uniform at 39.81 per cent.The reforms further support India’s Aatmanirbhar Bharat initiative by encouraging import substitution. Previously, high-calorific-value imported coal was cheaper than domestic low-grade coal due to the flat cess, placing Indian coal at a disadvantage. Removal of the cess levels the playing field, strengthening self-reliance and reducing unnecessary imports.Additionally, the reforms correct the inverted duty anomaly. Coal earlier attracted 5 per cent GST, while input services used by coal companies faced higher GST rates, typically 18 per cent. This mismatch resulted in substantial unutilised tax credit on the books of coal companies. The new measures allow companies to utilise these credits against GST liabilities, releasing blocked liquidity and reducing accounting losses.Despite raising GST rates from 5 per cent to 18 per cent, overall tax incidence on the final consumer is lower due to the removal of the compensation cess. Rationalisation of duty, elimination of the inverted structure, and release of blocked liquidity will benefit coal producers and consumers alike.The GST Council’s decisions mark a balanced reform aimed at boosting the coal sector while supporting power generation and national self-reliance.

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