India raises GST on coal to 18%; removes compensation cess

India has raised the goods and services tax on coal from 5% to 18% while abolishing the compensation cess, the finance ministry said in an official statement Sept. 3, a move that may increase power costs per unit in a country that relies on the fuel for 70% of its electricity.

Earlier, a compensation cess of Rupee 400/mt ($4.54/mt) was levied on coal in addition to the GST. In a statement on Sept. 3, the Ministry of Finance said, "The [GST] Councilhas recommended to end Compensation Cess, and hence, the rate has been merged with GST. There is no additional burden."

While coal -- whether domestic or imported -- used for power generation will become costlier, the impact on other industries such as cement, steel, and glass may not be as significant, since they can avail the benefit of input tax credit.

Businesses are allowed to claim credit for the GST paid on coal when it is used in the production of taxable supplies. However, this benefit is not available for electricity, as it is classified as an exempt supply under GST, and there is no GST levied on the sale of power in India.

While the official notification has not specified whether the higher GST will also apply to imported coal, taxes have been the same as those for domestic coal for many years.

An India-based coal trader said this shift would exert additional pressure on the coal market and ultimately result in increased electricity charges. "The higher the prices, the higher the GST component. With the cess, at least it was fixed."

Industry body Assocham had previously advocated for the removal of the coal cess in its pre-budget memorandum for the fiscal year 2025-26 (April-March), arguing that doing so would bolster power-intensive industries and ensure the competitiveness of domestic sectors.

Lower power demand due to prolonged monsoon conditions has resulted in decreased coal-based power consumption in India, leading to a decline in inquiries within the seaborne coal market, according to market sources. Despite this downturn, market participants anticipate a slight uptick in demand as the country approaches the festival season, which begins in late September.