The revision in the rate of Goods and Services Tax (GST) has rationalised the tax burden across various grades of coal with ₹260 per tonne being the average reduction in prices for the commodity supplied to the Power sector.
The revision in GST has rationalized the tax burden across various coal grades, as the previous GST regime led to higher effective tax incidence on low grade coal and low priced coal. With the changes in the GST, tax incidence has been rationalized with uniform tax incidence across coal grades, Coal Minister G Kishan Reddy said in a written response in Rajya Sabha.
“The average reduction in coal prices for the grades of coal supplied to power sector is approximately in the range of ₹260 per tonne, which is likely to reduce the cost of generation by 17 to 18 paise per kilowatt hour (kWh),” he added.
Earlier, coal companies paid 5 per cent to 28 per cent GST on their input services or inputs, while the output GST rate on coal was only 5 per cent, resulting in accumulation of unutilised Input Tax Credit (ITC), Reddu explained.
“By increasing the output GST rate on coal to 18 per cent, the inverted duty structure has been corrected, aligning the output and input tax rates and releasing huge amount of blocked liquidity in unutilised input tax credit,” he added.
The GST reforms have rationalised the taxes on coal and enhanced the operational and financial viability of domestic coal producers.
GST rationalisation
Removal of GST Compensation Cess of ₹400 per tonne, has made domestic coal more competitive vis-a-vis imported coal, which is likely to incentivise import coal based plants and other consumers to source cheaper domestic coal, thereby contributing towards Aatmanirbhar Bharat and the import substitution initiative, the Minister emphasised.
ICRA in a note (September 2025) explained that power utilities typically consume coal at a gross calorific value of 3,500-3,800 kcal/ kg at a notified pre-GST price of ₹800-900 per tonne (plus sizing, royalty, and other charges).
“The removal of compensation cess despite increase in the GST rate, is expected to reduce the cost of power generation for coal-based power producers by around 15 paise per unit,” it anticipated..
Besides, given the fact that around 70 per cent of the generation at an all-India level is from the coal-based capacity, this is expected to result in a reduction in the cost of supply for the Discoms by around 12 paise per unit, it added.
Rationalising coal cess has been a long standing demand of the industry. Coal Ministry had constituted an Inter-Ministerial Committee (IMC), for preparing a strategy paper on import substitution by 2030. The Ministry’s aim is to stop coal imports by power sector by FY26.
In March 2025, the panel had suggested that GST compensation cess should be imposed on an ad-valorem basis so that it is directly related to the price and quantity of coal, instead of a fixed amount of ₹400 per tonne.
One of the main reasons for higher import of coal in the country is the nature of GST compensation cess, which was charged at a flat rate of ₹400 per tonne irrespective of quality, price and source (domestic/ imported) of coal, the IMC pointed out.
