11 Jan 2020 11:33 IST

Impact of coal cess removal on steel and aluminium companies

If compensation cess is waived, it will help a slew of industries, but may shift focus from renewables

Various media reports suggest that the Prime Minister’s office has recently proposed a waiver of the compensation cess on coal. This is intended to lower the power producing cost so that companies can buy pollution-curbing equipment with the money saved.

The compensation cess on the production and import of coal, is levied at the rate of ₹400 a tonne. Waiving the cess is expected to help thermal power companies meet emission targets (by installing new equipment) while sustaining current electricity rates.

Besides cutting generation and distribution costs for companies, the cess waiver will also benefit steel and metal companies.

Low tax expense

The Clean Energy Cess, introduced in 2010, was collected for the National Clean Energy and Environment Fund (NCEEF). This fund was earmarked for research and innovative projects in clean energy and for the rejuvenation of the river Ganga. On implementation of GST, the Clean Energy Cess was abolished to introduce compensation cess (CC) on coal.

A company paying CC on purchasing coal could take input tax credit for the cess paid. For starters, input tax credit allows the setting-off of tax liability on sale of output, with tax paid on inputs (raw materials). As per the GST law, input tax credit of CC can be used to set off only the tax liability of the cess.

CC, which is applicable in case of sin and merit goods, is not applicable in case of output of steel and aluminium companies, which use coal as an input.

The unutilised CC can be claimed as refund by the companies, but only if the output is exported. The share of exports of most of these companies is, however, not substantial. Thus, tax credit of the cess paid on coal by these companies is neither utilised to set off tax liability on sale nor is it entitled for complete refund. Therefore, the cess on coal purchases is a cost to the company and results in lower profits.

Coal: key raw material

Power accounts for about 45 per cent of the aluminium-making cost and thermal is the major source of electricity for most of these companies. Vedanta, a diversified metals and mining company, used 32 million tonnes of coal in FY19, on which the company would have paid about ₹1,280 crore cess.

While Hindalco, an Indian aluminium and copper manufacturing company, requires about 17 million tonnes of coal per annum, resulting in cess liability of ₹680 crore.

Coal — both thermal and coking — is also a key raw material for steel making. Coal combined with iron ore accounts for nearly 64 per cent in the cost of production for steel companies. Any change in the prices of coal will impact the profits of the company.

According to JSW Steel, a five per cent increase in the cost of coal will increase costs for the company by ₹1,178 crore (about 14 per cent of FY19 net profit) with consequent reduction in the profits. Cess cost, which would constitute more than five per cent of the coal cost, would result in good savings, if removed.

Tata Steel too has a higher usage of coal. Besides production from the captive mines, the company imported about 85 lakh tonnes of the raw material in FY19.

Bottomline

It’s clear, therefore, that the removal of cess will help steel and aluminium companies boost their profits. But at what cost? Cutting taxes on coal would impact the growth of renewable energy as the move would reduce the price gap between coal-fired and renewable power. Currently, the unit cost of power from renewables is lower than thermal power.

Also, whether the coal cess, which contributes over three per cent to the total indirect tax collections (as per media reports), will be removed by the Centre during this economic slowdown is a moot question.

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