The GST rate rationalisation is expected to soften the price of thermal coal, which accounts for more than 70 per cent of India’s power generation. This is a move that will reduce cost of power generation.
Prior to GST rate rationalisation, coal attracted 5 per cent GST plus a compensation cess of ₹400 per tonne. The cess has been discontinued and the GST rate on all coal products (including thermal coal) has been increased to 18 per cent.
ICRA in a note 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.
“However, the pass through of this benefit by the state Discoms to the consumers remains to be seen,” ICRA emphasised.
Crisil Intelligence pointed out that for grades G2-G5, a marginal increase is expected in the delivered price, but they are not commonly used in the country. For grades G6-G17, a moderate decline is likely due to removal of the cess component.
“The delivered price of G11 thermal coal, which is used by the power sector, is expected to decline to ₹2,895-2,905 per tonne from the current ₹3,140-3,150 per tonne. The fall in coal prices will also help reduce electricity cost for end consumer to some extent,” it added.
Rationalising coal cess
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 Rs 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.
GST compensation cess is based on tonnage and not on gross calorific value (GCV). Imported coal being of high GCV (5,000-6,000 Kcal) in comparison to domestically supplied coal (3,000-3,500 Kcal), the tax incidence on imported coal on per Kcal basis is less compared to domestic coal.
For instance, During FY22, GST compensation cess collected on import of coal was around ₹8,359.15 crore against the total import value of ₹22,8742.44 crore translating into compensation cess incidence of 3.65 per cent.
While during the same period, GST compensation cess collected on domestic coal (CIL and SCCL) was around ₹29,096.8 crore against the approximate value of ₹11,7251.40 crore translating into the cess incidence of 24.82 per cent.
The panel said that a ₹100 per tonne increase in coal price makes power costlier by around ₹0.06 per unit. So, the GST compensation cess alone is increasing the price by around ₹0.24 per unit.
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