The tale of coal cess

It has been reported that on Wednesday (December 5), finance ministers of Delhi, Punjab, Puducherry and Madhya Pradesh and representatives of Kerala, Rajasthan, Chhattisgarh and West Bengal met the Union finance minister Nirmala Sitharaman and expressed their concern over the delay in the release of GST compensation.

In the GST Council meeting held in September 2019, the government anticipated a deficit of nearly Rs 40,000 crore in the GST collections as compared to what it had budgeted for FY 20 (2019-20). It may be recalled that the Central government had assured the states; while introducing the GST regime at a midnight bash in July 2017, to compensate the state governments should any fall in revenue collection occurs due to poor GST collection. Accordingly, a mechanism was announced to generate funds to meet any such contingencies in the future.

GST Compensation Mechanism: GST Compensation Cess on Coal

With the introduction of the Goods and Service Tax (GST), the Clean Energy Cess that was introduced in 2010 was abolished by the Taxation Laws Amendment Act, 2017. In its place, a new cess on coal production, called the GST Compensation Cess, was put at the same rate of Rupees 400 per tonne. The GST Compensation Cess was aimed at filling in the budget deficits that Indian states would face following the GST introduction.

In 2010, the government had imposed a cess on domestically produced and imported coal and formed the National Clean Energy and Environment Fund (NCEEF). The policy design was to earmark part of the revenues from the coal cess for the NCEEF that, in turn, funded research and innovative projects in clean energy. The coal cess revenues were also used for other needs such as the rejuvenation of the river Ganga.

The coal cess was levied on the dispatch of coal and lignite by coal producers and it discouraged coal consumption by increasing its cost. For this reason, the Indian government projected this as a 'carbon mitigation initiative' saying that "the coal cess translates into a carbon tax equivalent". A total of nearly Rs 84,400 cores revenue was collected in India in the form of the Clean Energy Cess on coal production between fiscal years (FY) 2010-11 and 2017-18. Out of this collected cess, only Rs 29,645.29 crore was actually been transferred to the NCEEF. The amount financed from NCEEF for projects is only Rs 15,911.49 crore or about 18 per cent of the total amount collected as coal cess.

Genesis of Cess Fund

Since its inception in 2010, the coal cess has been increased three times, from Rs 50 per tonne-Rs 200 per tonne in March 2015 and to Rs 400 per tonne in March 2016. In terms of a carbon tax equivalent, the 2016 increase in the Clean Energy Cess translated to a carbon price of around USD 4 per tonne of CO2 levied at the point of production. This was in line with the ambitious commitment made by the Indian PM during the Paris Agreement in 2015. Indian government's stand on commitments made at Paris got diluted after Trump became US President and started making noises against his country's involvement in the Climate Agreement of 2015. Trump first announced his intention to withdraw from the Paris deal in June 2017. Coincidentally, in the same year, India also abolished the Clean Energy Cess, introduced in 2010, and replaced it with the GST Compensation Cess!

Of the total cess collected from 2010 to 2017, the government allocated only 37 per cent to the NCEEF. It spent even less — under 30 per cent — on clean energy and environmental projects. The rest lay unused. The unspent funds amounted to Rs 56,700 crore and it was transferred to the GST Compensation Fund. Apart from this amount, Rs 29,700 crore was expected to be collected through cess in 2017-18. So by end of November 2019, the government must have collected more than Rs one lakh crore for the GST Compensation Fund through imposing cess on coal. It must be noted that only 7 states of India, those contribute nearly 97 per cent of total coal produced in the country, are the major contributors of the huge GST Compensation Fund that Central government has created through the imposition of cess on their produce.

In 2017-18, Odisha was the largest coal-producing state with a share of about 21.2 per cent followed by Chhattisgarh (21.1 per cent). Next in order of share in total production were Jharkhand (18.26 per cent), Madhya Pradesh (16.6 per cent), Telangana (9.18 per cent), Maharashtra (6.25 per cent) and West Bengal (4.33 per cent). The remaining 3 per cent of coal production was accounted for from UP, Assam, J&K and Meghalaya. Coal mining was confined mainly to the Public Sector which contributed 95 per cent to the national production.

The mineral-rich eastern and central India had suffered a huge loss due to the freight equalisation policy of 1950s. Here again, the same story of siphoning of funds from the coal-producing states, in the name of national interest, is unfolding. Central government should clearly answer three basic questions pertaining to coal cess: what was the rationale behind transferring collected money from NCEEF to GST Compensation Fund; which states got the maximum benefits of NCEEF; where has all the money of the GST Compensation Fund gone?

Views expressed are strictly personal