November 26, 2020 - A new cess on coal production, called the GST Compensation Cess, was put in its place at the same rate of Rs 400 per tonne.

The government of India introduced a cess on coal in the year 2010. It was like a carbon tax to be levied as an excise duty on items listed in the tenth schedule to the Finance Act 2010. These items are Coal Lignite and Peat. The purpose of levying this cess was to generate resources for financing and promoting clean energy initiatives, funding research in the area of clean energy and any other purpose related thereto. It was also very clear from the Finance Act 2010 that proceeds of the tax shall not be distributed to the states. When the cess was introduced it was to be at the rate of Rs. 100 per tonne, but when implemented it was effectively Rs. 50 per tonne as per notification dated 22/06/2010 to be effective from 01/07/2010.

In the Union Budget 2014-15, the rate of cess was increased to Rs. 100 per tonne. The original purpose of this fund was to finance and promote clean energy initiatives and research in the area of clean energy, but in the year 2014 while enhancing the rate the government also expanded the scope by including financing and promoting clean environment initiatives and research in the area of clean environment. In 2015 the government further raised the rate to Rs. 200 per tonne and in 2016 again increased it to Rs. 400 per tonne. With the introduction of the Goods and Service Tax (GST) in India in July 2017, the Clean Energy Cess was abolished by the Taxation Laws Amendment Act, 2017. A new cess on coal production, called the GST Compensation Cess, was put in its place at the same rate of Rs 400 per tonne. This last round of changes effectively means continued taxation of coal production as a source of funding for various regional development needs.

This National Clean Energy Fund (NCEF) started accumulating from 2010-11. The coal cess collected from 2010-11 to 2017-18 amounts to about Rs. 86,440.21 crores as per the information obtained from government in answers to parliament questions. Surprisingly out of this amount only Rs. 29.654.29 crores has been transferred to the NCEF only and Rs. 15,911crores has been utilized. During the years 2018-19 and 2019-20 the coal cess would be approximately Rs. 38,500 crores and Rs. 39,100 crores respectively.

The total amount now in the National Clean energy fund would be more than one lakh crores. In 2017 when GST was introduced the amount of unspent balance of about Rs. 56,000 crores in the NCEF was transferred to the State Compensation Fund which to be utilized to compensate the states for loss of revenue in the new regime. The transfer of this amount to the State Compensation Fund completely nullifies the original purpose and introduces an uneven and unjustified transfer of funds from the coal producing states to others.

The price of coal in India is the price at which CIL sells coal since there is no commercial mining and CIL and SCCL caters to more than 90% of the domestic market. Most of the coal found in India is of poor quality. The CIL notified price of grades of coal mostly found in the country ranges from Rs. 447 to Rs.1140. The tax on coal which includes Coal Cess, Royalty, District fund, Exploration fund and GST ranges from 114% to 60% for these grades of coal. For most power plants the grades of coal supplied is ranging from G11 to G14 and the taxation on this is about 80 to 90 % of the notified price.

The maximum coal in India is for power generation. The specific consumptions of most power plants in India range from 600 grams to 730 grams depending upon the efficiency of the boiler. We can take an average of 660 grams as specific consumption then the cost of fuel for one unit of power (Kwh) would be around one rupee of which 50% percent would be tax. In other words the power that we sell has a component of about 40 to 50 paise which is tax. The cost of solar energy has drastically come down and is competing with thermal power. It will not be unfair to say that this comparison is not justified. With very high degree of subsidization of solar power generation on one hand and high taxation and high rail freights on the other cannot lead to a fair comparison.

The government in 2010 started with a very noble cause to garner funds for promoting research and development in the sphere of clean energy. In 2014 when the new government was formed it raised the tax from Rs. 50 per tonne to Rs. 100per tonne and the following year to Rs. 200 with changed objectives. It was not anymore limited to issues related to clean energy but to all matter relating to environment and this seem primarily to provide funds for the “Ganga Cleaning Project”. Again in 2016 the government raise the tax to Rs.400 per tonne to demonstrate its commitment to the promises made at the COP21 meet in Paris. In 2017 this cess became the GST state compensation fund. If one sees the manner in which government kept on changing the rate and usage of this fund it is clear that this tax was being used to improve the government’s ways and means position.

Apparently now there is some indication that PMO is now considering abolishing the cess completely. The reason why this is being considered is also not hidden. The Ministry of Environment, Forest and Climate Change has brought out very stringent guideline for power plants in respect of various emissions. The most contentious one being sulphur oxides (Sox). While Indian contains very low percentage of sulphur, some which can easily be removed by simple washing the MOEF&CC is insisting on installation of FGDs. Without examining alternative solutions and insisting on installation of FGDs seems somewhat unwise. It would be prudent to examine this issue much more instead of going by the findings of some institution. PMOs interest is perhaps limited to containing the price of power and since reducing/ abolishing cess on coal could provide a margin of 40 paise or so to compensate for the increase linked to the installation of FGDs hence this notion.

It may be better to think in terms of reducing/abolishing cess in cases where the coal company improves the quality of coal and indirectly spins off several benefits in terms of lower transport cost, lesser pollution, lower consumption, lesser problems of ash disposal and also lower maintenance costs for the power plants. The action being pursued by the government will only benefit the foreign suppliers of FGD plants.