Shreyansh Singh, an IIT Kanpur alumnus, has eight years of experience in the finance industry. He has spent 5 years at American Express developing mid to long-term strategies for multiple markets including US, Europe and India. Shreyansh currently leads Growth and Strategy initiatives at Pice.
GST reduced the tax on domestic coal from 11–12% to 5%, lowering energy production costs.
Coal-based industries like power, steel, and cement now benefit from decreased input expenses due to simplified taxation.
Imported coal remains expensive due to additional Basic Customs Duty, limiting its competitiveness.
Coal transportation became cheaper with GST, as railway freight now attracts only 5% tax instead of 15% service tax.
Clean Energy Cess continues outside the GST regime, adding to the cost and supporting environmental initiatives.
As the world's largest source of electricity, coal continues to play a central role in energy security, particularly in developing economies. The duty on coal has undergone significant changes with the implementation of the Goods and Services Tax (GST) in India.
This article discusses the impact of GST on coal industry by considering its economic value, the pre-GST tax environment, amended GST rates and the general implications of the new tax system.
What is Coal?
Being the largest source of electricity in the world, coal remains a key force behind energy security, especially for developing economies. However, the coal tax burden has dramatically changed with the implementation of the Goods and Services Tax (GST) in India.
The Economic Importance of Coal
Coal is one of the principal energy sources in India. It continues to be a vital component of sectors such as steel, cement and construction, which utilise it for thermal generation and manufacturing purposes.
Furthermore, over 65% of India's electricity is generated from coal. The domestic supply of coal in India during the 2022–2023 financial year was 794.96 million tonnes (MT), while imports were 186.06 MT.
India imports coal from coal plants in Australia, Indonesia, South Africa, the United States and Russia to supplement its energy requirements. Besides electricity production, coke of coal is vital in the steel and iron sector.
In the past, the location of steel and iron plants was based on the availability of coal plants since a lot of coal was required for production. Coal gas is also utilised for the production of thermal energy in different industrial processes. Owing to its widespread usage, coal remains important to India's industrial growth and energy security.
Before the implementation of GST, coal power generation was subjected to multiple indirect taxes, making it very costly. The taxes that it imposed were Excise duty under the Central Excise Act and Value-Added Tax (VAT) regime from individual states. Coal and coal-based products are generally taxed at a standard VAT rate ranging between 5% and 6%.
Clean Energy Cess was imposed to promote renewable energy initiatives. Transport services attract a service tax of 15%, so the cost of tax rate incidence on coal was found to come out around 11–12% in the form of excise duties. Such multiple levels of taxation amounted to higher coal prices, influencing the costs of power generation and industrial units that utilised coal.
GST Rates on Coal and its Related Products
The introduction of GST substituted several indirect taxes with a more simplified tax system. The GST rates for products related to coal are as follows:
HSN Code
Product
GST Rate
2708
Pitch coke and pitch, which is obtained from coal
18%
2706
Tar distilled from coal
5%
2704
Semi coke and coke of coal
5%
2701
Ovoid Briquettes and other solid fuels which are similarly produced from coal
5%
2701
Coal
5%
2705
Coal Gas
5%
Impact of GST on Coal Industry
The introduction of GST has imparted both negative and positive implications to the coal industry and industries based on coal. Some of the most notable impacts are:
Less Tax Incidence on Domestic Coal: Coal at 5% GST is lower than the earlier 11–12% tax, thereby lowering the aggregate cost of domestic consumers for coal. This has made power-generating, steel-producing and cement-making businesses more competitive.
Reduction in Power Generation Expenses: The lower taxation on coal has led to decreased variable costs for thermal power plants. Since power plants based on coal enjoy a monopoly in the Indian power sector, lower taxation on coal stabilises electricity tariffs, indirectly favouring consumers.
Impact on Imported Coal: Even though domestic coal is taxed 5% less under GST, imported coal continues to face Basic Customs Duty (BCD) along with GST. This increases the cost of imported coal, making it less competitive than domestic coal. Therefore, industries that rely on imported coal will incur higher costs.
Effect on Transportation Costs: The introduction of GST has eased the taxation of coal transportation. Coal transportation used to be subject to a 15% service tax earlier. Railway transportation of coal is now subject to a 5% tax, which lowers the cost of logistics. Road transportation costs still run high because of fuel tax and state tax.
Challenges in Environmental Taxation: Even after GST reforms, the Clean Energy Cess has not been absorbed in GST. Coal producers have to continue paying an extra cost in the form of environmental taxes, which impacts the end price of coal. Though this promotes cleaner energy sources, it also raises costs for industries based on coal.
Overall, the impact of GST on coal industry has been noteworthy. Although it has lowered the price of domestic coal and lowered the cost of power generation, issues like customs duty on import and clean energy tax remain.
As India continues to transition towards sustainable energy, the role of coal and the coal tax policy will still play a pivotal role in shaping the destiny of the country's energy production.
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FAQs
How did GST change the tax structure on coal in India?
With the introduction of GST, the multiple indirect taxes on coal—such as excise duty, VAT, and service tax—were streamlined into a single tax rate of 5% for coal. Previously, the combined tax burden was around 11–12%. This reduction simplified the tax regime and decreased the overall cost for industries relying on coal, especially in power generation, steel, and cement sectors.
What impact has GST had on power generation costs?
The 5% GST on coal reduced the input costs for thermal power plants, which rely heavily on coal. As a result, the variable costs of power generation have declined, making electricity production more economical. This has a stabilizing effect on consumer electricity tariffs and improves the profitability and efficiency of thermal plants.
Are imported coal and domestic coal taxed differently under GST?
Yes, domestic coal is taxed at a flat 5% GST, whereas imported coal not only attracts the same GST but also faces a Basic Customs Duty (BCD). This makes imported coal more expensive than domestic coal, reducing its price competitiveness. Industries dependent on imported coal face higher operational costs as a result.
Has GST improved coal transportation logistics?
GST has positively impacted coal logistics, especially in rail transport. Previously subject to a 15% service tax, coal freight by rail now falls under a 5% GST rate. This has led to reduced transportation costs and increased efficiency. However, road transport still incurs high costs due to fuel and state taxes, limiting the full benefit.
Is the Clean Energy Cess still applicable after GST?
Yes, the Clean Energy Cess remains applicable and has not been subsumed under GST. It is levied on coal producers to fund renewable energy initiatives and environmental protection. While it promotes cleaner energy, it also adds to the overall cost of coal, partially offsetting the tax benefits provided by GST.
Shreyansh Singh, an IIT Kanpur alumnus, has eight years of experience in the finance industry. He has spent 5 years at American Express developing mid to long-term strategies for multiple markets including US, Europe and India. Shreyansh currently leads Growth and Strategy initiatives at Pice.
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