Explained: How the GST Council rewrote the rules of coal taxation

New Delhi: When the Goods and Services Tax (GST) Council met in New Delhi for its 56th meeting, few expected coal—India’s most widely used and politically sensitive fuel—to emerge as the headline story. But the Council’s decision to overhaul how coal is taxed has set off discussions across ministries, boardrooms and power corridors. By scrapping the flat compensation cess of ₹400 per tonne and raising the GST rate from 5 to 18 per cent, the government has tried to resolve anomalies that have plagued the sector for years.The changes are not cosmetic. They cut deep into the economics of coal mining, power generation and even import substitution. They also attempt to answer a tricky question: how do you rationalise taxes on a commodity that still powers over 70 per cent of India’s electricity, while also pushing towards cleaner fuels?Why coal taxes needed a resetUntil now, every tonne of coal attracted a flat compensation cess of ₹400, over and above 5 per cent GST. The uniform cess ignored the vast variation in coal grades. Lower quality coal—produced in bulk by Coal India—ended up carrying a disproportionately high tax burden relative to its price. For instance, G-11 non-coking coal carried a tax incidence of nearly 66 per cent, while better quality G-2 coal was taxed at around 36 per cent.The result was predictable: cheaper coal looked expensive, and domestic producers lost ground to imported coal with higher calorific value. Power plants that relied on local coal struggled with costs. And coal companies themselves saw working capital stuck in the system, because they paid 18 per cent GST on input services while collecting only 5 per cent GST on output.What exactly has changedWith the cess scrapped and GST lifted to 18 per cent, the structure has been flipped. The overall tax burden now falls to a more uniform 39.8 per cent across grades. For the power sector, that translates into an average saving of ₹260 per tonne of coal. In tariff terms, the government estimates generation costs could fall by 17–18 paise per kilowatt-hour.To put it simply, a reform that looks like a tax hike on paper is actually a tax cut in practice. By removing the blunt instrument of a flat cess, the Council has spread the load more evenly.

Ministries weigh in

Officials in both the coal and power ministries say the decision was the outcome of months of behind-the-scenes debate. A senior power ministry official said: “We had to balance two priorities—making sure power tariffs remain affordable, and ensuring coal companies are not financially squeezed. The cess created distortions that hurt both ends. This rationalisation gives relief to power generators while unlocking liquidity for producers.”The coal ministry echoed the sentiment. One senior official said: “For years we have faced criticism that Indian coal was losing out to imports simply because of the way taxes were designed. With the cess gone, the playing field is more level. This strengthens self-reliance, reduces unnecessary imports, and allows Coal India and other miners to plan investments without seeing money locked away as unclaimed tax credit.”

Industry reaction: relief mixed with caution

For the coal industry, the move has been welcomed almost unanimously. Producers who had unutilised tax credit piling up on their books finally see a way out. “It’s a release of blocked funds that can now be channelled into exploration and mechanisation,” said an executive of a coal-bearing state PSU.

Power companies too see a tangible impact. Vikas Agarwal, who heads a private thermal generation firm, said, “For every unit of electricity, we will now save close to 18 paise in fuel costs. It doesn’t sound much, but across thousands of megawatts and billions of units, the savings are substantial. It also improves our ability to service debt and stabilise cash flows.”

Yet, there is caution. Some distribution companies (discoms) worry that state regulators may not immediately pass on the benefit to end consumers. Others point out that rising transportation and handling costs could eat into the savings. “The reform is a net positive, but not a silver bullet. The test is how much of the benefit actually flows through to the consumer,” said an analyst at a ratings agency.

The bigger economic picture

Coal continues to dominate India’s energy basket despite ambitious renewable targets. With peak electricity demand touching record highs this summer, coal-fired power plants have been running close to capacity. Against that backdrop, any reduction in the cost of coal has a direct bearing on inflation, industry competitiveness and state power finances.The reform also fits into the government’s narrative of Aatmanirbhar Bharat. By removing the cess that made imported coal more attractive, domestic miners are expected to regain market share. Officials believe this will help curb imports, particularly of high-GCV coal used in blending. That in turn reduces foreign exchange outgo and supports local jobs.

From distortion to rationalisation

One of the less talked-about but crucial aspects of the decision is the correction of the inverted duty structure. For years, coal companies paid 18 per cent GST on equipment, machinery and services, but could offset only 5 per cent on their output. The mismatch created a stockpile of unusable credits. With the output GST now raised to 18 per cent, those credits can finally be utilised.An executive at Coal India described it as “getting our own money back”. The liquidity boost, according to industry watchers, could be in the range of several thousand crores over the next few years. That could fund new mines, cleaner technology adoption, and overdue upgrades.

Will consumers feel the difference?

For households, the immediate question is whether power bills will fall. Experts suggest the answer will vary. Some state regulators may incorporate lower generation costs into tariffs quickly, while others may delay adjustments. For industrial consumers, particularly in energy-intensive sectors like cement and steel, the benefit is likely to be clearer and more immediate.Still, the long-term significance lies not in one tariff cut but in the rationalisation of a distorted system. As one energy consultant put it: “Coal taxation was a blunt instrument. Now it is at least a scalpel.”

A balancing act

The GST Council’s coal reform highlights the delicate balancing act the government must perform—between supporting producers, protecting consumers, and maintaining state revenues. Removing the cess means states lose a source of compensation, but central officials argue the overall efficiency gains will more than offset that.The decision also signals a willingness to tackle politically sensitive commodities within GST. If coal can be rationalised, officials hint, other sectors with inverted duty structures could follow.

Looking ahead

Coal is not going away anytime soon. Even as India ramps up solar and wind, coal remains the backbone of the grid. Rationalising its tax treatment makes the system more transparent and predictable, reducing one layer of uncertainty for producers and power plants alike.Whether the reform succeeds will depend on how quickly the benefits flow through to discoms and end consumers, and whether it genuinely curbs imports. For now, though, both ministries and industry players are calling it a rare reform that leaves both producers and consumers better off.

As the coal ministry official summed it up: “We are not saying this will solve every problem in the sector. But for the first time in years, tax policy is no longer penalising the very coal grades that keep India’s lights on.”