GST 2.0: Big Relief for Coal Sector as Cess Removed, Boost to Aatmanirbhar Bharat
The recent major changes to India’s taxation structure of the coal sector are the conclusion of the 56th GST Council meeting held in New Delhi. Previously, coal used to attract GST of 5% and a compensation cess of Rs. 400 per tonne. According to the recommendations served in the GST Council meeting, the government is likely to remove the GST Compensation cess on coal and increase the rate of GST on coal from 5% to 18%.
The new rules lower the tax on coal grades G6 to G17, which now range from Rs. 13.40 to Rs. 329.61 per tonne. For the power sector, the average tax cut is Rs. 260 per ton, which will bring down the cost of electricity generation by about 17-18 paise per unit (kWh).
According to the reports, these reforms will also help in rationalising the tax burden on coal in relation to its pricing. Earlier, the government had levied a uniform GST compensation cess of Rs. 400 per tonne, regardless of coal’s quality. This used to adversely affect low-quality and low-priced coal. For instance, G-11 non-coking coal is the type of coal that is mainly manufactured by Coal India Limited. It used to suffer a tax incidence of around 65.85%, while G2 coal used to suffer a tax incidence of 35.64%. With the new GST reforms in 2025, the compensation cess has been removed on all categories of coal, and the tax incidence has now been rationalised to a uniform 39.81% on all categories of coal.
The GST reforms of 2025 will also support the goal of Aatmanirbhar Bharat by reducing dependence on coal imports. Earlier, because of the flat GST compensation cess of Rs. 400 per ton, imported coal with higher calorific value often ended up being cheaper than India’s low-grade coal. This made Indian coal less competitive. With the cess now removed, both imported and domestic coal are on a level playing field, which strengthens India’s self-reliance and reduces unnecessary imports.
Earlier, coal companies were required to pay more GST on input services than the GST they were collecting on sales of coal, and since there was no opportunity given to claim a refund, this extra credit kept piling up and blocked their funds. Now, they will be able to use this unused credit for a few years to pay their GST liability. This will free up their money and reduce losses caused by unutilized GST credit.
Even though GST on coal has been increased from 5% to 18%, the overall tax burden on the final consumer will actually reduce as the GST compensation cess has been removed. In addition to this, rationalising duty rates and fixing the inverted duty structure will release more funds, remove distortions, and prevent big accounting losses for coal companies. Overall, these GST council decisions are balanced reforms that benefit both coal producers and consumers.
