An Inter Ministerial Committee, set up by the Coal Ministry, has 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 ₹400 per tonne.

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The Ministry 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 in power sector by FY26.

One of the main reasons for higher import of coal in the country is the nature of GST compensation cess, which is presently being charged at a flat rate of ₹400 per tonne irrespective of quality, price and source (domestic/ imported) of coal, the IMC pointed out.

The 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, it added.

The panel observed that the situation has resulted in a “regressive taxing regime”.

Higher bill for domestic coal

The committee observed that the impact of cess, on the same quantity, becomes much higher for coal with lower GCV compared to coal having higher GCV.

“In terms of percentage, total taxes come from 37 per cent to 52 per cent of value of coal in case of higher GCV domestic coal and from 60 per cent to 115 per cent in case of lower grade domestic coal. It has resulted in a kind of regressive taxing regime,” it added.

For instance, sponge iron associations have been saying that they use 2 tonnes of domestic coal of 3,500 Kcal for producing 1 tonne of sponge iron entailing a coal compensation cess of ₹800. However, if imported coal with higher GCV is used, then 1 tonne would be required for producing a tonne of sponge iron and cess would be ₹400.

During FY22, the 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 the GST 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 Rs 29,096.8 crore against the approximate value of Rs 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.

GST cess rationalisation

“It is thus imperative that rationalising the GST Compensation Cess shall be considered for correct the market distortion that favours coal imports so that import of coal can be reduced,” the IMC suggested.

On a long term basis, the panel said that GST compensation cess may be imposed on “ad valorem basis” wherein the cess would be directly related to the price and quality of coal, instead of the present levy of a fixed amount.

It is pertinent to mention here that, in addition to GST compensation cess, various other charges/levies are imposed on coal on an ad valorem/percentage basis, it added.

Most of the levies are charged as a percentage (proportion) to a value, whereas GST compensation cess is levied at a flat rate, which distorts the pricing of coal, it said.

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Imposition of GST compensation cess on ad-valorem basis would also give benefit of any future increase in price of coal to the exchequer. The appropriate percentage of cess on coal may accordingly be decided so that the same can be revenue neutral and there is no loss to the exchequer, IMC recommended.

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