In his budget speech last year, the minister reduced customs duty to zero and countervailing duty (CVD) to 1% for steam coal. CVD is applied in addition to customs duty and is intended to protect production from indigenous industry by offsetting the subsidy provided by the governments of exporting countries .
As per the provisions of the Customs Tariff Act, coal has been classified into four separate categories: anthracite, bituminous, coking and steam coal. Steam coal is defined as low grade coal for use in power generation. Bituminous coal is largely considered to be used for making sponge iron and at times as a substitute for coking coal in the steel industry.
The reduction in import duties last year was intended to reduce the cost of power plants having to increasingly rely on imported coal because of domestic shortages. Import duties on other coal, such as higher grade bituminous coal, were left unchanged with a customs duty of 5% and CVD of 6%.
Customs, however, was unable to differentiate coal grade based on end use and began to use the gross calorific value (GCV) to make the distinction between steam coal and bituminous coal. Coal with a GCV of 5,500Kcal/kg or less was classed as steam coal. Coal with a GCV of 5,600Kcal/kg and above was classed as bituminous.
Concerns over misclassification and misreporting have led to delays in customs clearance and dispatch from ports to power stations. Customs officials recently seized an imported coal shipment from Udupi Power Corporation limited at the port of Mangalore on this account.
Levelling taxes between the two coal categories seeks to clear this uncertainty.
"Steam coal is exempt from customs duty but attracts a concessional CVD of 1%. Bituminous coal attracts a duty of 5% and CVD of 6%'" Mr Chidambaram said in his budget speech.
"Since both kinds of coal are used in thermal power stations, there is rampant misclassification. I propose to equalise the duties on both kinds of coal and levy 2% customs duty and 2% CVD."
Parliament is expected to approve the proposal during the on-going budget session.
The tax adjustment is also part of the government's strategy to generate more revenue to help plug the increasing current account deficit gap, which Mr Chidambaram pointed to as a growing area of concern.
"The CAD [Current Account Deficit] continues to be high mainly because of our excessive dependence on oil imports, the high volume of coal imports, our passion for gold, and the slowdown in exports," he said.
Industry reactions were mixed.
The Association of Power Producers (APP), which represents the interest of major privately owned power generation companies, has welcomed the announcement.
"We had made a representation to the government over the confusion in levying duty by customs officials because it was not possible to ensure end use by them," APP director general Ashok Khurana said in an interview.
"The move to equalize is a welcome move.
"Companies like Adnai, JSW and a host of other coastal players who were importing higher quality coal were being forced to pay an import duty of 6% while those importing low quality coal were paying only a countervailing duty of 1%.
"Following the clarification, taxes on both variety of coal has been equalized and it will help the nation import higher quality of coal at a uniform rate."
The possibility that tax changes would result in higher imports were not uniformly shared.
PricewaterhouseCoopers Private Limited executive director Kameshwara Rao said in his view, overall impact of the government proposal on coal sector would be neutral.
"The government has only made a clarification, which, indeed it should have done much before to avoid distress in the coal import sector," he said.
Chief Executive Officer of Mercados Energy Markets India Private Limited CEO Anish De told Indian Coal Report India had been importing coal by default, not by choice.
"So import volumes are unlikely to get affected and cost variations is not that much either," he said.
Much of the demand for imported coal comes from the inability of Coal India Limited (CIL) to supply sufficient domestic coal.
A senior power company official said the change would disproportionately affect smaller players that imported low GCV coal.
"Almost 75% of the imported coal will belong to steam coal type categorisation. Now they will have to bear this additional financial burden," he said. The newly imposed duty structure would have power utilities that imported low grade of thermal coal paying US$85-90M more a year to meet their fuel requirements. Each tonne of imported coal, in his view, would now cost them approximately US$1 more.
Despite the current focus on applicable taxes on imports, the budget reemphasises the need to move away from imports in the medium and longer term.
Mr Chidambaram said it was estimated that imports would rise to 185 million tonnes in 2016-17.
"If the coal requirements of the existing power plants and the power plants that will come into operation by 31.3.2015 are taken into account, there is no alternative except to import coal and adopt a policy of blending and pooled pricing. In the medium to long term, we must reduce our dependence on imported coal," he said in his speech.
Many analysts and industry observers continue to believe that imported coal hasn't found a safe place within Indian energy markets.
Mr De said greater dependence on imported fuel for the long term was the wrong approach.
"This is going to severely affect the country's balance of payments," he said. "Increased trade deficit then will add more to the economic woes of the country."
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