Coal faces GST uncertainty as compensation cess may end early

With the GST compensation cess set to lapse sooner than expected, industry is grappling with uncertainity over whether the GST rate on coal — currently at 5 per cent — will be raised to 18 per cent. Coal is among a handful of items such as tobacco, aerated drinks, and certain vehicles that attract the cess, which compensates states for revenue loss under the GST regime.

Alternatively, the cess on coal could be kept in the form of a new levy, in the image of its predecessor the “clean environment cess” pre-GST.

The final decision rests with the GST Council, which meets in New Delhi on September 3.

Relief likely for captive coal users, even if GST rises

The GST compensation cess is legally set to lapse in March 2026, however, the Council may decide to end it sooner in the upcoming meeting. On coal, the cess amounts to Rs 400 per tonne. As captive coal users cannot claim input tax credit (ITC) on the levy, its expiry could provide some relief to sectors like cement and steel.

At the same time, the Council could raise GST on coal to 18 per cent to cover the revenue shortfall. Since captive coal users are allowed to claim ITC on GST if the electricity generated is consumed in the manufacturing of taxable goods, increasing the rate is likely to have no direct impact on them.

Effective GST burden on thermal plants may not change much

Power producers could also benefit from the compensation cess expiring. However, if the rate rises to 18 per cent, the gains are likely to be reduced. Unlike captive coal users, thermal plants supplying electricity to the grid cannot claim ITC on coal in order to prevent negative taxation as the sale of electricity is exempt from GST.

Currently, the 5 per cent GST and the compensation cess amount to an effective rate of 15–40 per cent, depending on the grade of coal, according to experts. Therefore, increasing the rate to 18 per cent along with removing the cess may lead to savings among users of lower grades of coal. For higher grades, there is unlikely to be any significant impact.

States eye mineral levies as cess expiry threatens revenue

While the Council can introduce a new cess to offset the revenue loss from removing the compensation cess, if it does not, states are likely to raise their own mineral levies. In July 2024, the Supreme Court upheld the right of state governments to tax mineral-bearing lands. Some have already acted — Jharkhand in March raised its coal levy from Rs 100 to Rs 250 per tonne, which could go up further once the compensation cess lapses.

Any changes at the Council meeting will have to weigh potential revenue loss to states. Last week, eight opposition-ruled states said they expect a 15–20 per cent hit to their current GST revenues, both from rate rationalisation and from not fully merging the compensation cess into the GST rate structure, as discussed in the GoM on Compensation Cess in December 2024.

If the compensation cess goes, tobacco will continue to face the current 88 per cent tax incidence, as the Centre is likely to propose an additional excise duty over the existing 40 per cent GST. For other luxury items such as large SUVs and high-end cars, a levy beyond 40 per cent may be considered, but that would require amending GST laws. For coal, it remains to be seen.