Coal Ministry says GST reforms to address input tax credit anomalies, levels playing field for all coal variants

The Coal Ministry, in a statement issued on Monday (September 22, 2025), said that the reforms finalised at the 56th Council of the meeting, most of which came into force on September 22, would help rationalise tax burden across all grades of coal to ensure “equitable treatment” as well as address anomalies arising from inverted duty anomalies.

The council at its 56th meeting had recommended eliminating the ₹400/tonne compensation cess previously levied on coal and increasing the GST to a higher 18% compared to the 5% earlier. 

GST reforms LIVE

Tax incidence rationalised across the board

Referring to the elimination of the compensation cess, the ministry observed it to have “disproportionately” affected low-quality and low-priced coal. “For instance, G-11 non-coking coal produced in the largest quantity by Coal India had a tax incidence of 65.85% compared to 35.64% for G2 coal,” it stated, adding, “With the cess removed, tax incidence across all categories has been aligned to a uniform 39.81%.”

Thus, the elimination of the compensation “levels the playing field” wherein the landing cost of high gross calorific value imported coal was than that of the domestically produced low-grade coal, it argued. The former is vital for specific use-cases where consistent heat is required and certain key industries including steel. India imports coking coal and high-grade thermal coal which are in short supply within the country’s reserves. Industry body ASSOCHAM had sought the removal of the compensation cess, during the pre-budget consultations, arguing that it would be of help to power-intensive industries – bolstering the competitiveness of the domestic sectors.

Addressing unutilised tax credits

The ministry said coal now attracting 18% GST, instead of the erstwhile 5%, would also help address “inverted duty anomaly”. Coal as a final output previously attracted 5% GST while input services [by the coal companies], were taxed at 18%. Thus, creating a situation wherein the input costs exceeded the realisation from the final product in the books of the coal companies. “With no provision for refund, this amount kept increasing, blocking valuable funds,” the ministry noted, adding, “Now, the unutilised amount can be used over the coming years to pay off GST tax liability, leading to the release of blocked liquidity and helping coal companies mitigate losses due to the accumulation of unutilised GST credit and enhances financial stability.”

Poignant to note, S&P Global observed in their analysis (Sept 4) had put forth concerns that coal, whether imported or domestic, used for power generation will become costlier. Additionally, the impact on other industries, such as cement, steel, and glass “may not be significant” since they can seek input tax credit. For perspective, businesses have the provision to seek credits for the GST they pay on coal. However, this does not accrue to power-generating companies because supplying electricity is exempted from the taxation paradigm.

The ministry maintains the GST revisions would result in a “substantial reduction in overall tax burden” with prices of coal grades, between G6 to G17, declining in the range of ₹13.40/tonne to ₹329.61/tonne. It estimates for the power sector, the reduction would average to about ₹260/tonne, would translate into a cut of 17-18 paise per kWh in the cost of generation.