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India's GST Council has restructured taxes to promote renewable energy, reducing GST on solar, wind and biogas components to 5 per cent.
At the same time, taxes on coal and lignite have been increased to 18 per cent.
This aims to make renewables more affordable and discourage fossil fuel use.
The automotive sector also benefits with reduced taxes on small vehicles, enhancing accessibility for consumers.
In a landmark policy shift to accelerate India's clean energy transition, the 56th Goods and Services Tax (GST) Council on September 3, 2025 revised the tax structure for the energy sector. Effective September 22, the GST on renewable energy components such as solar cells, windmill equipment and biogas plants will be reduced from 12 per cent to 5 per cent, while the GST on coal and lignite will increase sharply from 5 per cent to 18 per cent.
The dual move is aimed at making renewable energy more affordable and competitive, while gradually disincentivising the use of fossil fuels.
The GST council continued to levy a 5 per cent tax on electric vehicles (EV). Small cars and entry-level motorcycles will become cheaper. Petrol, LPG and CNG cars with engines below 1,200 cc and diesel cars up to 1,500 cc (provided they are not longer than 4,000 mm) will now attract 18 per cent GST instead of the current 28 per cent.
The changes also extend to commercial vehicles. Three-wheelers, buses and trucks, as well as ambulances, will now be taxed at 18 per cent instead of 28 per cent. Small hybrids will also see a reduction.
All mid-size and large cars (those exceeding 1,200 cc petrol or 1,500 cc diesel engines, or measuring longer than 4,000 mm) will now attract a flat 40 per cent GST.
The Central Board of Indirect Taxes and Customs, in its official notification, stated that the revision is designed to “promote renewable energy goods in the country” and reduce India’s dependence on imported solar modules, particularly from China.
The GST cut on clean energy equipment is being widely hailed by industry experts and developers as a major enabler for India’s ambitious climate goals. The lower tax rate will reduce the capital cost of renewable energy projects, making solar, wind and biogas-based power more accessible and affordable across various sectors.
“This move will directly reduce the cost of renewable power, boost adoption across sectors, and improve project economics for developers and investors,” said Sachin Singh, Associate Director at The Energy and Resources Institute (TERI). “It supports national schemes like PM Surya Ghar and PM-KUSUM, enabling more competitive tariffs and faster project rollouts.”
The tax cut is also expected to accelerate the repowering of ageing wind farms and large-scale deployment of solar and wind power. JP Chalasani, chief executive of Suzlon Group, noted, “Lower taxation on turbines, nacelles and blades will bring down the levelised cost of energy, enabling faster commissioning and stronger investor returns.”
For the biogas sector, the impact is equally promising. Vijay Nirani, founder & managing director of TruAlt Bioenergy, highlighted that the reduced GST will improve the viability of biogas projects, especially at a time when India imports 50 per cent of its natural gas needs. “This decision unlocks new opportunities for farmers, small businesses and green entrepreneurs. It creates local jobs and empowers rural communities,” he said.
Despite the long-term benefits, some short-term operational challenges remain. Projects awarded under older GST rates may need to renegotiate Power Purchase Agreements (PPA) under ‘Change in Law’ clauses, potentially leading to temporary financial adjustments.
“There could be a one-time blockage of working capital due to accumulated input tax credit on capital goods. But this is a transitional issue, and the overall policy direction is strongly positive,” Saurabh Agarwal, tax and new energy partner, EY India, pointed out.
The government has acknowledged the issue of inverted duty structure and stated that refund mechanisms are in place to address it. Process reforms are also underway to ensure timely reimbursements, providing further reassurance to developers.
On the fossil fuel front, increasing the GST on coal and lignite to 18 per cent could have raised power generation costs. However, the simultaneous removal of the Rs 400 per tonne GST compensation cess offsets the increase.
Saunak D, a coal analyst, estimated that although the GST hike would increase coal prices by about Rs 166.27 per tonne for G-12 grade coal, the removal of the cess results in a net decrease of Rs 233 per tonne. “This effectively reduces power generation costs by around Rs 0.17 / kWh,” he noted.
The sentiment was echoed by Ratul Puri, chairman of Hindustan Power. “While the tax rate on coal has been raised from 5 per cent to 18 per cent, the overall impact will be minor as the existing compensation cess of Rs 400 per tonne has now been subsumed within the GST rate.”
It aims to simplify the tax structure and replace the compensation cess before its scheduled end in 2026. Past issues involved the non-refundability of input tax credit for the cess on coal inputs, where the final product wasn’t subject to cess and potential state revenue impacts from cess expiry, which the merger seeks to mitigate.
The reduction is set to bring renewed cheer to consumers and inject fresh momentum into the Indian automotive sector in this festive season, said Shailesh Chandra, president, SIAM. Making vehicles more affordable, particularly in the entry-level segment, these revisions will significantly benefit first-time buyers and middle-income families, enabling broader access to personal mobility.
The continuation of 5 per cent GST on EVs will help sustain the ongoing momentum towards sustainable mobility. Furthermore, “the resolution of classification interpretations and the correction of the inverted duty structure will greatly streamline business processes across the automotive industry, supporting ease of doing business,” Chandra said.