Effective coal prices to fall by Rs 100-150 under GST

The effective price of coal for consumers is likely to decrease by Rs 100-150, as the country heads moves to a uniform tax regime under the Goods and Services Tax (GST).

Preliminary estimates by Coal India suggest that consumers were effectively charged 11-11.5 per cent for procurement, which is going to decrease to five per cent under the new tax rules. Moreover, the stowing cess of Rs 10 per tonne, paid by coal consumers, in addition to the effective value added tax (VAT) and excise duty rates will be done away with. The additional cess of Rs 400 per tonne will continue to remain in place.

A Coal India official said that though the company would be appointing a consultant to "deeply understand and analyse the financial implications on the company", internal estimates suggest that prices are going to reduce.

"Although the net effect on the company is yet to be understood, Coal India's revenue will not take any hit as the tax was passed on the consumers and under GST, the same process will remain. Thus a net price decrease in coal will not affect revenue," the official said.

As per sector experts, a price reduction in coal will translate into electricity prices dropping by 6-7 paise per unit, which is likely to be passed on to the consumer as per the anti-profiteering clause in GST.

Analysts said that the proposed tax under GST, together with the new coal linkage policy, Shakti (Scheme to Harness and Allocate Koyla (Coal) Transparently), will boost demand from the power plants for domestic coal over the imported variant.

"The demand for coal in the current fiscal year might grow in excess of six per cent. Apart from a revival demand in the of power sector, the new coal policy facilitates replacement of some quantity of imported coal from the private coastal plants," Debasish Mishra, partner at Deloitte Touche Tohmatsu said.

Coal India officials said after a hiatus in coal procurement from the power sector, the demand is returning. Although Coal India was able to meet 91 per cent of the 49.51 million tonne sales target at 45.27 million tonne in April this year, it marked an increase of six per cent in its sales volume on a year-on-year basis.

However, the new linkage policy may result in the coal behemoth losing a part of its revenue earned in the e-auctions.

Thermal power plants usually enter into a fuel supply agreement (FSA) with Coal India on the notified coal price. However, in case their demand exceeds the quantity of coal agreed upon in the FSA, these plants have to meet this excess demand from Coal India's e-auction. E-auction is one of the key channels for Coal India to increase its bottomline as the minimum price of coal in this auction is usually 20 per cent above the notified price of Coal India.

"In case we have to supply coal through the FSA route, then e-auction volume for the power sector is likely to come down", a senior Coal India official said.

An analyst with Motilal Oswal said this impact can be to the tune of Rs. 200 crore for the company considering that 20 per cent of the e-auction volume is driven by the power sector.

Under Shakti, coal linkages would be awarded to designated state-owned power distribution companies. These, in turn, would assign linkages to state or central power generation companies via allocation, and through auction to private units.

The independent power producers participating in the auction will bid for discounts on the existing tariff and this would be adjusted from the gross coal bills.

Coal India officials said that despite the FSA auction where the power producers will get assured supply of coal, they need to make upfront payment for coal purchases so that the coal monolith is not faced with cash receivables piling overtime.


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