- Steel segment to see lower input costs, improved profits
- Coal traders, dealers may require higher working capital
The 56th Goods and Services Tax (GST) Council meeting in New Delhi has reshaped the taxation of coal, a key input for multiple industries. The Council raised the GST on coal from 5% to 18% while abolishing the INR 400/tonne (t) compensation cess. At first glance, this suggests coal has become costlier, but the real impact depends on whether buyers can claim input tax credit (ITC).
Previously, coal attracted 5% GST and a fixed cess of INR 400/t. The GST portion was creditable, but the cess was not, making it a dead cost for businesses. Now, the cess is gone, replaced by 18% GST that can be fully claimed as ITC by eligible buyers. This shift simplifies taxation, though it increases the upfront working capital requirement due to the higher GST outflow.
Market reactions
In the short term, a wait-and-watch approach dominates. Sellers with old stock carrying cess are rushing to liquidate, while buyers prefer to delay purchases until new contracts reflect the updated GST framework. Market participants expect the full impact to play out in the coming months once stockpiles adjust and ITC benefits begin to flow through.
Impact on various sectors
Steel to gain from lower input costs: For the steel industry, the abolition of the cess is a significant gain. Earlier, INR 400/t of coal could not be claimed back, adding to production costs. With the new GST structure, this non-creditable cost has been eliminated. This reduction in input costs improves profitability and makes Indian steel more competitive internationally. Steel prices may soften domestically, supporting demand from construction, automotive, and infrastructure. Export competitiveness is also expected to improve as Indian producers gain cost advantages against global peers.
Uneven impact on power plants: The power sector faces a divided impact. For independent power plants that supply electricity to the grid, the situation is unfavourable. Electricity is outside the GST regime, which means these generators cannot claim ITC on the coal they purchase. As a result, they now face higher procurement costs, with no credit offset available.
Captive power plants, however, experience a different outcome. Since the electricity they generate is used for producing finished goods that fall under GST, they can claim ITC on coal. This makes the change neutral to positive for industries relying on captive generation.
The contrast highlights why opinions are mixed: while the government insists there will be no additional burden on consumers, experts warn that the higher GST could translate into increased tariffs for end-users in cases where ITC is unavailable.
Cement producers to see dual benefit: The cement industry stands to gain directly from these changes. Not only can cement makers now claim ITC on coal purchases, but the GST Council has also reduced GST on cement from 28% to 18%. This dual benefit substantially lowers production costs. Industry insiders suggest this translates into a straight cost saving equivalent to INR 400/t of cement. This strengthens margins and competitiveness in both domestic and export markets.
Coal traders, dealers may face liquidity pressures: For coal traders and dealers, the new structure presents challenges. The jump from 5% to 18% GST increases the upfront working capital requirement. While ITC can be claimed later, the higher outflow puts pressure on liquidity. Delays in refund cycles, especially for exports or slow-moving inventories, may further strain finances. For small or unregistered traders who cannot claim ITC, the shift is particularly burdensome, making coal effectively more expensive.
Enhanced operational efficiency for mining businesses: For producers like Coal India Ltd., the change is largely neutral to positive. The dual tax structure of GST plus cess has been replaced by a unified GST, simplifying invoicing and compliance. The removal of cess disputes reduces the risk of litigation, while transparency improves across the coal value chain. The tax change is unlikely to directly alter Coal India’s base pricing, but it strengthens efficiency for its buyers, indirectly supporting demand.
Related outcomes from the GST Council meeting
The coal changes came alongside broader reforms under the GST 2.0 framework. Renewable energy components such as solar and wind equipment saw their GST reduced from 12% to 5%, signalling the government’s intent to support the clean energy transition. At the same time, a uniform 18% GST was imposed on all types of batteries, and certain construction materials and appliances saw reductions in tax rates.
Conclusion
The restructuring of coal taxation has different implications across sectors. Steel and cement gain from reduced costs and improved credit flow, power producers face mixed outcomes depending on their ability to claim ITC, traders grapple with higher working capital needs, and miners benefit from simplified compliance. While the immediate market is adjusting cautiously, the removal of the cess and integration into the GST framework is expected to bring efficiency, reduce dead costs, and strengthen industrial competitiveness in the medium term.
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