India Will Increase Taxes on Power-Station Coal, Bauxite

India will raise import taxes on thermal coal and export duties on bauxite, part of a plan to increase government revenue and plug a budget deficit.

Overseas purchases of steam and bituminous coal, both used by power producers, will attract a customs duty and a countervailing duty of 2 percent each, Finance Minister Palaniappan Chidambaram said in his budget speech to lawmakers in New Delhi today. Bauxite exports, which are duty-free now, will be taxed at 10 percent.

Higher coal taxes will raise the generating cost of electricity companies, which have been forced to increase coal imports after local supplies fell short of demand. The tax on exports of bauxite, used to produce aluminum, may boost local supplies amid mining curbs that have reduced output in Odisha, the largest producing state.

“Thermal power plants using imported coal entirely will see their power generation cost increasing by at least 5 to 6 paise per kilowatt hour,” said Debasish Mishra, senior director at Deloitte Youche Tohmatsu India Pvt. in Mumbai. “The ones more dependent on imported coal will see a higher price rise than those using local coal or with limited blending.”

Countervailing duty is a tax placed on imported goods that are being subsidized. This helps to even the playing field between the domestic producers and the foreign producers receiving subsidies.

Steam Coal

Steam coal, which accounts for most of India’s imports for power stations, has a 1 percent countervailing duty and no customs tax, while bituminous coal, which has a higher heat value, has 5 percent customs tax and 6 percent countervailing duty. Indian power producers mostly prefer steam coal.

“The move to impose a 2 percent customs duty on coal imports is disappointing as many power projects in the country are suffering from fuel linkage issues,” said Hemant Kanoria, chairman of DPSC Ltd., a power producer.

A shortage of bauxite forced Vedanta Resources Plc to shut its alumina refinery in December, leaving its planned $9 billion aluminum project in the eastern state of Odisha in a state of uncertainty.

Under the Customs Tariff Act, coal has been classified as anthracite, bituminous, coking and steam coal. While steam coal is only used for electricity generation, most bituminous coal is used for making sponge iron and as a partial substitute for metallurgical coal.

Rising Imports

Coal imports by power producers, steelmakers and cement makers was 100 million metric tons in the nine months ended Dec. 31, widening the nation’s current account deficit. Imports are expected to reach 185 million tons in the year ending March 2017, Chidambaram said.

“The costs for utilities importing coal will increase as a large portion of the commodity is of the steam variety on which customs duty has doubled,” said Rakesh Arora, head of research at Macquarie Capital Securities (India) Pvt. “There won’t be any major impact on imports as the requirement of coal for power is quite high.”

Delayed land acquisitions, environmental approvals and lack of railway transport has impeded the expansion plans of Coal India Ltd. The Kolkata-based company, which produces more than 80 percent of India’s coal, may consider involving private companies as partners to boost production.