GST Council Cuts Tax On Renewable Energy Equipment To 5%, Hikes Coal Tax to 18%

In a major boost to India’s clean energy sector, the GST Council has reduced the tax rate on renewable energy devices and equipment from 12 percent to 5 percent. The decision, taken at the 56th GST Council meeting in New Delhi, is expected to lower costs for manufacturers, promote domestic production, and accelerate the adoption of green technologies. Add to that an incentive scheme for critical mineral recycling that has also been announced, and the broader green transition sector has received a major boost.

Notably, between the announcement of plans to rationalise the GST structure and actual announcement of the details, it has been barely 20 days, which is some sort of a record for a change of this magnitude. That augurs well in terms of how alive the government is to required changes to keep the economic engines humming.    

Tax Cuts for Green Energy

The new 5 percent GST rate will apply to a wide range of renewable energy products. These include solar photovoltaic cells and modules, solar cookers, water heaters, biogas plants, windmills, waste-to-energy systems, tidal and ocean energy devices, and solar lanterns or lamps.

In addition, the concessional tax slab has been extended to fuel cell vehicles - including hydrogen-powered cars, buses, and trucks - a step closely aligned with the Centre’s National Green Hydrogen Mission. This brings fuel cell motors in line with electric vehicles, which already attract a 5 percent GST.

Finance Minister Nirmala Sitharaman said the measure would drive affordability. “Reducing GST to 5 percent on renewable energy devices and parts is meant to strengthen India’s green power ecosystem and support manufacturers,” she said.

In addition, the government also addressed duty structure challenges. The Central Board of Indirect Taxes and Customs (CBIC) noted that renewable energy components often faced an inverted duty structure, where taxes on inputs exceeded those levied on final goods. While the lower GST rate could deepen this imbalance, the government assured that refund mechanisms for such cases would continue, supported by faster processing systems.

Coal and Battery Tax Changes

In line with its push to curb fossil-fuel reliance, the Council raised GST on coal and lignite from 5 percent to 18 percent. This is expected to make conventional energy sources comparatively less attractive while nudging the industry towards renewable alternatives. The Council has also recommended to end Compensation Cess on coal and merged it into GST rate with no additional tax burden , potentially delivering Rs 250 per tonne savings, which could lead to a marginal drop in fuel costs as well for thermal operators.

Prior to the rate rationalization, coal was taxed at 5% GST plus Rs 400 per tonne Compensation Cess. The Council has now recommended to end the cess and merged the rate into an 18% GST.

Separately, the GST on non-lithium batteries, including lead acid, sodium-ion, and flow batteries, was reduced from 28 percent to 18 percent. This move is aimed at strengthening large-scale energy storage solutions critical to integrating renewable power into the grid. Lithium-ion batteries, widely used in EVs, remain under the 18 percent slab.

Broader GST Rationalisation

The changes came as part of a broader tax restructuring exercise. The Council resolved to phase out the 12 percent and 28 percent slabs, consolidating most products and services into the 5 percent and 18 percent categories.

By easing taxes on clean energy technologies while raising levies on polluting fuels, the government outlined a clear intent: to reshape India’s energy landscape towards sustainability and self-reliance. 

Highlighting the significance of the move for renewable industry, Gautam Solar Director Gautam Mohanka applauded the reform, emphasising that it greatly increases the accessibility of solar installations for households, businesses, and farmers across the country. He said, "By reducing this financial barrier, the government is making solar power more affordable, enabling faster adoption, which will directly help cut carbon emissions and reduce dependence on fossil fuels.

"We believe this tax break will not only boost energy security and encourage new project pipelines but also contribute meaningfully to India's climate action commitments and its global responsibility to combat climate change. I commend the Council's vision and urge swift implementation so that the industry can leverage this momentum for a greener, more climate-resilient future," he added.

Critical Minerals 

The new incentive scheme for critical minerals recycling earmarks INR 1500 crores between 2025-26 to 2030-31. It incentivises the development of capacity to recycle battery waste and e-waste, Applicable for investment in new units as well as expansion and modernisartion of existing ones. There is a ceiling of INR 50 crores for large entities as defined, and INR 25 crore in support for smaller entities. The government expects the scheme to bring about INR 8000 crore of fresh investments and create 70,000 direct and indirect jobs.