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GST Cess Gone, Electricity Bills Down: Why Coal Power Gets Cheaper at 18% GST
The Government’s decision to rationalize GST on coal and renewable energy and withdraw the ₹400/tonne cess on coal is a welcome step. It simplifies the tax structure, eases working-capital pressure on generators and—at current coal prices—can lower the cost of coal-based power, while the 5% GST on RE devices makes new solar and wind projects more affordable. The move brings clarity and predictability to the sector, supports consumer affordability, and aligns with a steady shift toward cleaner energy.
The GST Council has ended the separate compensation cess and merged the burden into GST, raising the GST rate on coal from 5% to 18% but removing the ₹400/tonne cess. Although a higher GST rate may appear cost-increasing, the arithmetic shows that for most coal used by power plants the net tax falls once the fixed cess is withdrawn under the old system the tax was 5% of the coal price plus ₹400/tonne, whereas under the new system it is 18% of the coal price with no cess.
A simple formula shows the change per tonne: New tax minus Old tax = (18% of price) − (5% of price + ₹400) = 13% of price − ₹400. The break‑even price is ₹3,077 per tonne (that is ₹400 divided by 0.13). If the coal price is lower than ₹3,077 per tonne, the new system reduces tax. If the coal price is higher than ₹3,077 per tonne, the tax goes up.
The new tax arithmetic (per tonne)
Old regime: 5% GST + ₹400/t cess
New regime: 18% GST, no cess
Net change per tonne: Δ=0.18P−(0.05P+400=0.18P−(0.05P+400) =0.13P−400
Break-even price P= 400/0.13≈₹3,077/t approx. meaning
• If coal < ₹3,077/t, net tax falls.
• If coal > ₹3,077/t, net tax rises.
Current price of FSA & E-auction Coals
FSA/notified coal G11 grade ~₹1,803/ tonne for June 2025
( https://coal.nic.in/sites/default/files/2025-07/29-07-2025-awn-nci.pdf)
E-auction coal ~₹2,671/tonne
Both are less than the break-even price of ₹3077 per tonne. Therefore, even with GST increase from 5% to 18% and removal of Cess @ Rs 400 per tonne, the tax is lower.
On FSA, Savings= 1803*(.18-.05)-400= ₹165 per tonne
On E-auction coal, savings= 2671*(.18-.05)-400= ₹52.7 per tonne
(E-auction used as a realistic working proxy; actual lots vary by mine/grade.)
Two quick examples make this clear. For notified/FSA coal at about ₹1,803 per tonne, the net tax falls by roughly ₹165 per tonne. For e‑auction coal at about ₹2,650 per tonne, the net tax falls by about ₹52.7 per tonne. These are typical working prices for power-sector coal; individual mines and grades can differ.
Using FY 2024–25 as a baseline, and keeping the arithmetic transparent, the power sector used about 921.2 million tonnes of coal and produced about 1,331 TWh of electricity. If we assume 10% of that coal came via e‑auction (priced around ₹2,671 per tonne) and the rest on FSA ( average priced around ₹1,803 per tonne for G11 grade), the total annual tax saving is about ₹14,100 crore.
Total Savings =.9*921.2*165+.1*921.2*52.7= ₹ 13680 Crore+ ₹ 484 Crore ~ ₹14,164 Crore Spread over 1,331 TWh, this is a reduction of about 10.64 paise per kWh. Because the cess was a cash outflow, removing it also lowers working‑capital and inventory carrying costs. Using an 80‑day cycle at 11% per year adds a further saving of about 0.26 paise per kWh. In total, the near‑term reduction is about 10.9 paise per kWh on coal‑based electricity.
What does this mean for bills?
If the national average power purchase cost (APPC) is around ₹4.50 per kWh, a reduction of roughly 11 paise per kWh or around 2.5% on coal‑based generation is material. Actual pass‑through will depend on CERC and SERCs orders and the mix of power each DISCOM buys, but the direction is clear: the cess removal more than offsets the higher GST rate at current coal prices.
There are a few sensitivities to watch. The benefit shrinks as coal prices rise toward the break‑even level of ₹3,077 per tonne, and it can turn into a cost increase beyond that. A higher share of e‑auction or imported coal, which is usually more expensive, will also reduce the benefit. Other levies such as royalty, DMF/NMET, rail freight and handling charges remain unchanged and continue to affect the landed cost of power.
At the same time, the GST on renewable‑energy devices and parts has been cut from 12% to 5%. This makes new solar and wind projects cheaper by roughly 12–15 paise per kWh at the project level. However, this relief appears gradually in the grid average because it applies only to new capacity as it is commissioned, while the coal tax change applies immediately after the effective date.
GST on RE devices/parts 12% → 5%.
1) Project-level (for new RE only)
RE is capex heavy. With ~70% of capex in taxed “devices & parts”, a 7 pp GST cut trims all-in capex by ~4.9%.
With capex ≈ 85% of LCOE, RE tariffs fall ~4–5% → ~12–15 paise/kWh (for a ₹3.0/kWh baseline).
This benefit only accrues to new/under-construction projects aligned with the new GST rate and contractual pass-through.
2) System-level (grid average today)
Because existing RE capacity has already incurred capex, the immediate grid relief is small.
Upper-bound illustration (if the full non-hydro RE fleet felt a 12–15 paise drop): the grid-average relief is ~1–2 paise/kWh given RE’s current generation share.
Near-term reality—only newly added RE sees the discount: sub-1 paise/kWh grid relief initially, scaling up as more 5%-GST projects come online.
Implementation timeline.
Implementation remains subject to formal notifications. The GST Council has indicated an effective date of 22 September 2025, with phased roll-outs possible for certain items. Utilities should closely track the final notifications and file timely pass-through petitions so that benefits are reflected in consumer tariffs without delay.
Change in Law treatment
These tax changes constitute a Change in Law under standard PPAs and the Ministry of Power’s competitive-bidding framework. Accordingly, the net impact (increase or decrease) from moving coal to 18% GST and withdrawing the ₹400/tonne cess is pass-through from the notification’s effective date, subject to approval by the appropriate Commission. Adjustments should be computed on actuals, supported by invoices, and recovered or refunded via the variable/energy charge (or supplementary bills), together with carrying cost as permitted by applicable regulations and orders. DISCOMs and generators should file promptly to ensure transparent and timely reflection in tariffs.
In short, ending the ₹400/tonne cess and moving coal to 18% GST lowers the cost of power at today’s coal prices. The fixed cess was sizable; removing it more than offsets the higher percentage GST for most power-sector coal, delivering real, near-term relief even as India steadily adds more renewables.
Bottom line: at prevailing prices, the change reduces coal-power costs by ~11 paise/kWh. The benefit shrinks as coal prices approach ₹3,077/tonne (the break-even level). The GST reduction on Renewables will also contribute but its relief appears gradually in the grid average because it applies only to new capacity as it is commissioned, while the coal tax change applies immediately after the effective date. Timely notifications and prompt regulatory pass-through will ensure the benefits reach consumers quickly, and part of the savings can be channeled into grid upgrades, storage, and flexibility services to strengthen reliability during the transition.
Assumptions
• Coal used by power: ~921.2 MT; generation denominator: 1,331 TWh (FY 2024–25 baseline).
• Price proxies: FSA ₹1,803/t; e‑auction ₹2,671/t; working mix 90% FSA / 10% e‑auction (illustrative).
• Working‑capital relief: 80‑day cycle @ 11% p.a. applied only to tax cash flows for a simple estimate.
• Break‑even price for neutrality: ₹3,077/t (400 ÷ 0.13).
• Other charges (royalty, DMF/NMET, rail freight, handling, duties) are unchanged and outside this calculation.
• Pass‑through depends on CERC/ SERC orders on Change in Law and each DISCOM’s portfolio, timelines subject to final GST notifications.
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