GST impact: Effective coal prices reduce by 2-3% for power sector consumers

However, prevailing local taxes and environmental taxes have effectively led to less price reduction

After the implementation of the goods and services tax (GST) regime, effective coal prices — notified price plus taxes — have decreased by 2-3 per cent for consumers from the power sector as the new tax structure has abridged several additional taxes.

Coal attracts 5 per cent tax under the new tax regime compared to 12 per cent tax earlier. Prevailing local taxes, environmental taxes and other hidden charges have effectively brought down the tax rate by 2-3 per cent, instead of seven per cent.

"In effect, the effective tax rate on coal has reduced by 2-3 per cent, which is also considerable given the volumes the coal consumers purchase," an official at the Coal Consumers Association said.

A sector analyst opined that the coal users are now probably calculating the net impact on input costs and the input tax credit which they can avail.

"The major consideration is if tax levied during ferrying of coal will be included as [the] total cost of coal or not. In case logistics cost is separate, it effectively brings down net coal prices," a sector analyst said.

Moreover, the new tax regime has also widened the scope for Coal India (CIL) to claim input credit on its costing front.

Previously, under the value-added tax (VAT) system, CIL used to claim back part of the five per cent VAT it paid during procurement of materials. However, central excise of two per cent and some other regional taxes could not be claimed back.

Under the new tax structure, which has modified the entire system of levy of taxes, the company is in a position to claim back a major part of the taxes as input credit.

"While GST has widened the scope of claiming input credit, we need at least a (financial) quarter to understand the actual implications. But definitely, on our procurement and input side, taxes will go down," a CIL official said.

The company had paid a total tax of Rs 5,166 crore in the financial year (FY) 2016-17 while the tax outgo stood at Rs 7,172 crore in FY16. For CIL, apart from wages, stripping (a way removing waste material) activity adjustment, power intake and raw material consumption are the major overheads where the scope of claiming input credit has widened.

Sector experts are of the opinion that in case effective input taxes for the coal monolith decreases, it will have to pass it over to consumers of power, steel, cement and others, according to regulations.

Although it implies that the notified prices of coal may go down as a direct result of the non-profiteering clause, analysts are of the opinion that immediately the Maharatna company may not choose to revise prices as it will assess the overall cost impact first and couple it with other considerations.

"The company may also opt to credit back part of the payment to the consumers after the GST cost assessment is done rather than going for [an] outright change in notified prices," a second sector analyst said.