The Goods and Services Tax (GST) Council recently introduced two major reforms for the energy sector: restructuring the tax regime for coal and reducing GST rates for renewable energy equipment. These measures aim to rationalise taxes, improve sectoral competitiveness and ensure a balanced energy transition. While the coal sector reforms aim to address long-standing tax distortions and improve liquidity for producers, the renewable energy tax cuts are designed to make clean energy deployment faster and more affordable. Together, they support the government’s twin goals of achieving energy affordability and an Aatmanirbhar Bharat.
Coal sector reforms
Rationalised tax and price reduction: The GST Council has removed the Rs 400 per tonne compensation cess on coal and raised the GST rate from 5 per cent to 18 per cent. Although the higher GST rate may appear inflationary, it, in fact, lowers the overall tax incidence for most coal grades.
Earlier, the uniform cess burdened low-grade coal more heavily. For example, G-11 coal had a tax incidence of 65.85 per cent, compared to 35.64 per cent for G-2. With the cess being removed and a flat 18 per cent GST being applied, the tax incidence has now equalised at about 39.81 per cent. This will make G-6 to G-17 coal grades cheaper by Rs 13 to Rs 330 per tonne. Power producers are expected to save around Rs 260 per tonne, translating into a 17-18 paise per kWh reduction in generation costs.
Boost to domestic production: The earlier cess made imported coal more competitive than domestic grades of coal. The new structure removes this distortion, improving the relative price of Indian coal and supporting domestic mining.
Correction of the inverted duty structure: Raising GST on coal to 18 per cent also corrects the inverted duty structure. Under the previous regime, the input goods and services used in mining were taxed at 12-18 per cent, while coal output was taxed at only 5 per cent. This caused an accumulation of unutilised input tax credits and blocked working capital for producers such as Coal India Limited and Singareni Collieries Company Limited.
Impact on consumers: The reforms benefit both producers and consumers. Producers gain from improved liquidity and financial efficiency, while power producers, who consume over 75 per cent of India’s coal, benefit from lower landed costs.
Renewable energy reforms
Lower GST to improve affordability: The GST Council has reduced the GST rate on renewable energy devices and components from 12 per cent to 5 per cent, effective September 22, 2025. The reduction is expected to lower the levellised renewable tariffs, easing distribution companies’ financial burden for electricity procurement. This could translate into nationwide annual savings of Rs 20 billion-Rs 30 billion in power procurement costs.
Reduced project costs: The lower GST directly reduces the capital cost of renewable projects. For instance, a 1 MW solar project costing Rs 35 million-Rs 40 million will now save Rs 2 million-Rs 2.5 million. A 500 MW solar park could save over Rs 1 billion. This reduction will make renewable tariffs more competitive and projects more viable without subsidies.
Support for households and farmers: For households, a 3 kW rooftop solar system will now cost Rs 9,000-Rs 10,500 less, improving adoption under the PM Surya Ghar: Muft Bijli Yojana. Under PM-KUSUM, a 5 HP solar pump costing about Rs 250,000 will now cost around Rs 17,500 less. With 1 million such installations, the total savings could reach Rs 17.5 billion.
Encouraging domestic manufacturing: The GST cut will lower the cost of domestically made renewable components by 3-4 per cent, boosting the competitiveness of Indian manufacturers. This supports the government’s target of achieving 100 GW of solar manufacturing capacity by 2030.
Accelerating the energy transition: The reform is expected to enhance project viability and accelerate renewable capacity addition. Even a 2-3 per cent cost reduction could unlock Rs 1 trillion-Rs 1.5 trillion in additional investments. Faster renewable deployment will also reduce emissions. Each GW of solar energy can avoid about 1.3 million tonnes of CO2 annually.
The way forward
These reforms fit into the government’s larger plan of simplifying GST, ensuring compliance, reducing disputes, and making the tax system more predictable. Beyond fiscal reform, the moves align India’s taxation policy with its energy and sustainability goals. The coal sector will benefit from fair taxation and liquidity, while renewables will gain from lower costs and accelerated growth. Together, these measures strike a balance between traditional energy security and clean energy expansion. They improve affordability for consumers, efficiency for producers and competitiveness for domestic manufacturing.
Akanksha Chandrakar
