GST Council hikes coal tax to 18% and lowers rates on renewables

The 56th Goods and Services Tax (GST) Council meeting held on 3 September 2025 announced significant changes for India’s energy sector. The most striking decision was the increase in GST on coal, lignite, and peat from 5 per cent to 18 per cent. At the same time, renewable energy devices, fuel cells, electrolysers, and inputs such as silicon wafers and ammonia will now attract lower GST rates of 5 per cent. The dual treatment reflects a fiscal attempt to make fossil fuels more expensive while supporting clean energy adoption.

Coal sector

Coal, lignite, and peat, which were previously taxed at 5 per cent GST, will now be taxed at 18 per cent. This change is among the sharpest increases applied to any major commodity in the energy sector. The Council’s decision signals an intent to reduce reliance on coal by discouraging its consumption through higher taxes. While coal remains central to India’s electricity generation, this tax hike alters the cost dynamics for thermal power plants and may eventually influence state distribution companies that purchase coal-based electricity.

Renewable energy devices

The Council lowered GST rates on a wide set of renewable energy devices and systems. Solar cookers, solar water heaters, solar power-based devices, solar power generators, biogas plants, windmills, and waste-to-energy plants have moved from 12 per cent to 5 per cent. The concessional rate also applies to solar lanterns, solar lamps, ocean and tidal wave energy devices, and photovoltaic cells, whether assembled into modules or not. By reducing GST on such equipment, the Council has made renewable energy adoption more cost-competitive.

Hydrogen economy: fuel cells and electrolysers

Fuel-cell motor vehicles, including hydrogen vehicles not exceeding 4,000 mm in length, remain under the concessional 5 per cent slab. 

Electrolysers also benefit from a reduced GST rate. As per the notified schedules, electrolysers and their parts for manufacture fall within the renewable category eligible for 5 per cent GST. This reduction directly supports India’s National Green Hydrogen Mission by cutting the capital costs of hydrogen production facilities.

Silicon wafers

Silicon wafers have seen a reduction in GST from 12 per cent to 5 per cent. This cut directly eases the cost burden on solar manufacturing units. Since wafers are the basic material for panel assembly, the lower rate makes upstream components cheaper and strengthens domestic manufacturing.

Biodiesel and biofuels

The Council made a split decision on biodiesel. Biodiesel supplied to oil marketing companies for blending with high-speed diesel now attracts a concessional rate of 5 per cent. However, biodiesel supplied outside the blending programme has seen its GST rate increased to 18 per cent. This differential approach encourages structured blending within the official biofuel programme while restricting biodiesel distribution through unregulated channels.

Capital goods and infrastructure for Discoms

Power distribution companies rely heavily on capital goods such as transformers, conductors, ring main units (RMU), air circuit breakers (ACB), and associated equipment. Under the rationalised GST structure, these items fall under the standard 18 per cent slab. Earlier, certain items were taxed as high as 28 per cent. Their consolidation into the 18 per cent category provides cost relief for distribution infrastructure development.

Civil works also gain indirectly from the GST reduction on cement, which has moved from 28 per cent to 18 per cent. Since cement is a core component in substations, grid expansion projects, and other construction-related activities, this cut reduces capital project costs for Discoms.

Other industrial energy items

The rate on steam has been reduced from 12 per cent to 5 per cent. Steam is an important input for several industrial processes and plays a role in captive power and cogeneration systems. This reduction eases cost pressures for industries that rely on steam for heating, power generation, or combined heat-and-power applications.

The GST on biodiesel supplied outside the oil marketing structure being increased to 18 per cent stands in contrast to the treatment of biodiesel within the blending programme. The Council’s decision shows an effort to direct biofuel markets into regulated frameworks rather than leaving them open to independent supply chains.

For day-to-day operations, electrical machinery, generators, circuit breakers, and industrial tools are now standardised under the 18 per cent slab. This removes earlier variations where items were taxed at 12 per cent or 18 per cent, providing uniformity.

Historical GST treatment of coal and renewables

Since the introduction of GST in July 2017, coal has consistently been kept in a lower tax bracket compared to other goods. It was originally placed at 5 per cent GST, a move designed to prevent sudden shocks to the cost of electricity. Over time, this concessional treatment became a point of debate, as it kept coal-based power relatively cheaper while renewables faced higher GST on equipment such as solar modules and wind turbines.

For renewable energy, the initial GST rollout placed most devices, including solar panels and wind equipment, under the 5 per cent rate. However, components such as solar inverters, cables, and balance-of-system equipment attracted higher slabs of 12 per cent or 18 per cent, creating an inverted duty structure. Developers often faced higher taxes on inputs than on finished products, leading to cost and refund complications.

The 56th Council meeting in 2025 marks the first time coal has been shifted to a high slab of 18 per cent, while renewables and their upstream inputs, such as silicon wafers and electrolyser, have been aligned under a low 5 per cent rate. This reverses the earlier pattern where coal enjoyed fiscal preference. The decision establishes a new framework where fossil fuels face a higher GST, and renewables are streamlined under concessional treatment.

Consolidation into a two-slab structure

The Council’s decision to consolidate GST into two main slabs of 5 per cent and 18 per cent, along with one special 40 per cent slab, creates a simplified framework. For the energy sector, this reduces classification disputes and provides clarity. Items earlier taxed at 28 per cent, such as cement and IT hardware, are now placed at 18 per cent. Renewable energy devices are clustered at 5 per cent, while coal is shifted upward to 18 per cent. The two-slab structure creates sharper fiscal contrasts between fossil fuels and clean energy, allowing Discoms and generators to plan costs with greater certainty.

Revenue needs and phased implementation

The Council clarified that changes in GST rates for most goods and services will come into effect from 22 September 2025. However, coal and related fossil fuels remain subject to the revised 18 per cent rate while the compensation cess continues until loan obligations under the compensation cess account are cleared. This ensures revenue continuity even as rates are adjusted.

The Council also directed that provisional refunds arising out of inverted duty structures should be implemented administratively through system-based risk analysis. For the energy sector, this particularly applies to renewable devices where inputs and final products may fall under different GST brackets.

Balancing fossil fuels and clean energy

The sharp increase in coal GST, combined with the widespread reduction for renewable devices, highlights the Council’s effort to align fiscal policy with India’s clean energy pathway. By making fossil fuels more expensive and clean energy equipment more affordable, the Council is creating tax signals that encourage a gradual transition.

This transition, however, depends not only on tax rates but also on how the increased costs of coal are absorbed across the value chain. Power producers may seek to pass higher input costs onto distribution companies. Distribution companies, in turn, face liquidity constraints, and tariff hikes remain subject to regulatory approval. The Council’s tax measures thus form only one part of a broader shift that requires regulatory and financial adjustments.

Outlook for the power sector

The decisions of the 56th GST Council meeting indicate a clear policy orientation. By raising the GST rate on coal, lignite, and peat to 18 per cent, the Council has made fossil-based power more expensive at the source. By reducing GST to 5 per cent on renewables, electrolysers, fuel cells, and silicon wafers, the Council has cut costs across clean energy supply chains. By applying differential treatment to biodiesel, it has linked fiscal incentives to structured blending programmes.

Discoms benefit through lower costs of renewable procurement, cement, IT hardware, and standardised rates on O&M and administrative items. These measures improve procurement efficiency and reduce project costs, even though the electricity supply itself remains exempt from GST. The two-slab structure also simplifies compliance for Discoms, limiting disputes and easing contract management.

Together, these measures reshape cost structures within India’s power and energy sector. They push coal higher up the tax ladder while lowering the tax burden on clean technologies. The result is a fiscal framework that aligns with India’s long-term climate commitments while also securing revenue needs.

GST changes in the energy sector: