NEW DELHI – The coal ministry on Monday welcomed changes to the goods and services tax (GST) regime for the sector, saying the removal of a compensation cess and a higher GST rate would reduce distortions, ease financial pressure on producers and cut costs for consumers.
The new rules, which is now being implemented following the 56th meeting of the GST Council in New Delhi, eliminate the ₹400 per tonne compensation cess on coal while raising the GST rate from 5% to 18%.
According to the ministry, the overall effect is a reduction in tax incidence despite the higher GST rate. It estimated that coal grades G6 to G17 would see prices fall by between ₹13.40 and ₹329.61 per tonne.
For the power sector, which consumes the majority of India’s coal, the average benefit is around ₹260 per tonne, translating into a cut of 17–18 paise in the cost of producing one kilowatt hour of electricity.
Officials said the reform corrects a long-standing imbalance that penalised lower quality grades of coal. Under the previous system, the flat cess meant G-11 non-coking coal, the grade most widely produced by Coal India Limited, faced an effective tax incidence of 65.85%.
By comparison, higher grade G-2 coal was taxed at 35.64%. With the cess removed, the incidence has been aligned at about 39.81% across all grades, the ministry said.
The ministry also said domestic coal producers had been placed at a disadvantage against importers under the old regime, as the flat cess kept the landed price of high-calorific value imported coal below that of locally produced lower grade coal. Removing the cess, it said, levels the playing field and strengthens India’s self-reliance in coal.
Another key change is the correction of what the ministry described as an “inverted duty anomaly.” Coal attracted GST of 5%, while input services used by coal companies were taxed at 18%.
This led to a large build-up of unutilised tax credits in company accounts, with no option for refunds. The increase in GST on coal to 18% means producers can now offset these credits against output liabilities, freeing up liquidity and reducing financial strain.
“Despite the increase in GST rates, the overall burden for consumers is lower while producers gain from the release of blocked funds and a more balanced system,” the ministry said.
Coal remains central to country’s energy mix, accounting for about 70% of electricity generation. India produced a record 893 million tonnes of coal in the 2023-24 financial year, with state-run Coal India contributing 703 million tonnes, according to government data.
India has pledged to expand renewable energy but rising power demand has kept coal consumption at record levels. Officials say reforms to the tax system are aimed at improving efficiency and competitiveness while reducing unnecessary imports.
The GST Council, chaired by Finance Minister Nirmala Sitharaman and comprising state finance ministers, sets indirect tax policy for the country. The 56th meeting approved the coal sector changes as part of a broader set of tax adjustments.
