The government of India is highly dependent on the energy sector, with the central and state governments’ dependence being at 25% and 13% of their tax revenues, respectively.

Coal phase-out to severely affect govt’s revenue collection: Report

The transition away from coal will severely affect the tax and non-tax revenues of the governments, requiring them to take steps to compensate for lost tax revenue and to facilitate targeted spending on alternative livelihoods, finds the study

A new study found that phase out of coal, as targeted at the COP26 in Glasgow, will severely impact the tax collected by the governments and could eventually negatively impact the economy down to a micro-economic scale. 

The Indian coal industry pays a myriad of taxes to the state and central governments including royalty, goods and services tax (GST), GST compensation cess, cess on coal, state sales tax, central sales tax, clean energy cess, and others. 

According to the report, the government of India is highly dependent on the energy sector, with the central and state governments’ dependence being at 25% and 13% of their tax revenues, respectively. The report found that the coal industry is responsible for 10% and 2% of the central and state governments’ energy tax revenues, respectively. From a statutory levy of ₹59.81 per tonne of coal in 1990-91, the amount has increased to ₹797.86 per tonne in 2021-22 due to imposition of GST Compensation Cess, DMF, NMET and other levies, the report added. This amounts to thousands of crores on an annual basis.

India is in the initial phase of moving away from fossil fuels for its energy needs. However, the report warned, as more clean energy policies are adopted, this transition may soon pick up pace, and this will severely affect the tax and non-tax revenues of the governments eventually impacting other economic sectors and India’s overall growth and development.

The report said that the government of India holds a stake of 66.13% in Coal India Limited (CIL) and received an interim dividend of ₹ 5,705.89 cr and final dividend of ₹ 1,426.47cr in 2021–22. As part of royalty, GST, District Mineral Foundation (DMF), National Mineral Exploration Trust (NMET) and others, CIL paid ₹ 49,678.36 cr in 2021–22, making it one of the most significant contributors to the Indian economy.

It produced 623 million tonnes of coal in 2021-22 and has set a target of producing 1 billion tonnes by 2024-25. Although the share of coal in the country’s total primary energy demand will drop to 34% by 2040, the overall demand is expected to rise by 31%, thus keeping the production at high levels. The report pointed out that this provides the government with sufficient time to adjust to reduced earnings from the coal industry, or at the very least, develop a plan to adjust with the same.

The impact of a coal phase will have a significant impact on tax revenues, with some states suffering more than the others, the report found. Due to a difference in resource availability, states with higher fossil fuel reserves and production contribute significantly to the state revenues through royalty, e.g., Jharkhand and Chhattisgarh. 

Coal is the source of livelihood for people in many districts in India, with some districts almost entirely being dependent on it. The industry provides direct and indirect employment to a large chunk of the India population and hence, a phase out will require strategic structural reforms to pave the way for new employment-generating sectors. 

In addition to this, coal mining promotes infrastructural development such as roads, schools and hospitals through CSR initiatives. CIL spends a large amount on healthcare, education and rural development through its CSR initiatives. In 2021-22 CIL spent ₹ 548.98 crores which is 19.53% higher than the statutory requirements. Therefore, phase out will hamper the development of several social projects and impact thousands of households. 

The report recommended an assessment of effective tax rate, revision of subsidies and  royalty, diversification in coal-dependent communities as well as of government’s income sources, etc. It also suggested reviewing and reforming the fiscal setting of the coal sector. It is important that the funds received by the government are judiciously utilised for the benefit of the people affected by mining activities and to generate alternate sources of employment for them to achieve a just transition. The report said that institutional strengthening is required for the national, state and local governments to develop just transition targets and policies in a harmonious and sustainable approach.