Rising Coking Coal Prices Squeeze Indian Steel: Unpacking the GST, Import Compliance, and Fiscal Realities

The Indian steel industry, currently positioned as the world’s second-largest producer of crude steel, is facing a severe margin squeeze. A confluence of global supply disruptions, geopolitical conflicts, and mining disasters has driven coking coal prices sharply upward. Because India relies on imports to meet 95% of its metallurgical coal requirements, this price surge is not merely an operational challenge—it is a fiscal event with profound implications for indirect tax management, working capital liquidity, and long-term capital expenditure compliance.

The Operational Shock: Rising Coal Costs and Price Caps

According to data from commodity consultancy CRU, premium hard coking coal prices surged by 25% compared to the previous year, averaging $236 per metric ton freight on board (FOB) Australia during the first seven months of 2026. This escalation is attributed to a series of compounding factors: slower-than-expected production ramp-ups at new mines, severe supply disruptions in Australia, a catastrophic coal mine disaster in Shanxi, China, and geopolitical premiums stemming from the U.S.-Iran conflict.

For blast furnace-based steelmakers, coking coal is a critical raw material, accounting for approximately 40% of total steel production costs. Industry estimates indicate that every $10 per ton increase in coking coal prices adds between $7 and $9 per metric ton to the cost of producing steel. Under normal market dynamics, manufacturers might absorb these expenses by raising prices for end-consumers. However, Indian steel mills are currently constrained by a surge of cheap steel shipments from China, which limits their pricing power and compresses profit margins.

The Tax and Compliance Implications: Squeezed Margins and the GST Trap

While the operational challenges of rising coal costs are evident, the fiscal and tax implications for Indian steelmakers are equally severe. Because India imports 95% of its coking coal, the surge in international prices has a direct, compounding impact on the indirect tax compliance landscape, particularly regarding Integrated Goods and Services Tax (IGST) and Input Tax Credit (ITC) management.

Upfront IGST Outflow and Working Capital Blockage

Under India’s GST regime, the import of coking coal is treated as an inter-state supply and is subject to IGST at the port of entry, alongside basic customs duties. When premium hard coking coal prices rise by 25%—averaging $236 per metric ton—the taxable base for calculating IGST expands significantly. Steel mills must pay this inflated IGST upfront at the time of customs clearance. Even though this IGST can eventually be claimed back as Input Tax Credit (ITC), the delay between paying the tax at the port and utilizing the credit against domestic sales liabilities creates a severe cash-flow bottleneck. For a sector where every $10/ton increase in coal costs adds $7 to $9 per metric ton to production costs, this upfront tax burden strains working capital when liquidity is already tight.

The ITC Accumulation Dilemma and Pricing Constraints

In a healthy market, rising input costs are passed on to end consumers, increasing the outward GST liability and allowing rapid absorption of accumulated ITC. However, Indian steelmakers currently lack the headroom to raise domestic steel prices due to the influx of cheap Chinese steel imports. This creates a structural mismatch: high IGST paid on imported inputs but stagnant GST collected on finished steel sales. The result is a slower rate of ITC utilization. Steel mills find their capital locked up in tax credits that cannot be quickly offset, effectively turning an indirect tax into an interest-free loan to the government at a time when they need liquidity to fund capacity expansions.

Customs Valuation and Diversification Compliance

To mitigate the reliance on expensive Australian coal, Indian mills are diversifying their import portfolios toward Mozambique, Russia, and the United States. However, shifting supply chains introduces compliance hurdles under Customs and GST laws. For instance, importing coal from Russia—where discounts have recently diminished—or Mozambique requires strict adherence to customs valuation rules to prevent transfer pricing disputes. Tax authorities closely scrutinize transaction values of commodities from non-traditional routes to ensure there is no undervaluation to evade duties. Steelmakers must maintain meticulous documentation, including freight and insurance invoices (which have also risen due to the U.S.-Iran conflict), to satisfy rigorous audit standards.

Impact on Capital Expenditure and State Revenues

The margin squeeze threatens to delay planned capacity expansions. When steel giants defer capital expenditure (capex), the delay ripples through the tax ecosystem. Large-scale expansions generate substantial GST revenue through the procurement of capital goods, engineering, procurement, and construction (EPC) contracts, and logistics. A slowdown in these activities directly impacts the GST collections of industrial states. This fiscal drag is highly relevant to discussions surrounding the shrinking divisible pool, as states heavily reliant on industrial GST collections may face revenue shortfalls, compounding their fiscal dependence on central transfers. Furthermore, delayed expansions stall the broader momentum of India’s structural reforms and fiscal anchors, which rely on robust domestic manufacturing to sustain economic growth.

Supply Chain Diversification and Regulatory Compliance

According to the commodities consultancy BigMint, India’s coking coal imports are projected to rise by 2 million to 3 million tons in the 2026-27 fiscal year, up from 64 million tons a year earlier. To feed this demand, domestic mills are actively seeking to diversify their sourcing. While Australia is expected to remain the primary supplier, meeting at least half of India’s needs, shipments from alternative countries like Mozambique, Russia, and the United States are on the rise.

This diversification strategy, however, is fraught with logistical and regulatory challenges. Mozambique is expected to eventually overtake Russia and the United States as India’s second-largest coking coal exporter, with major players like the state-run Steel Authority of India (SAIL) and JSW Steel turning to East Africa for supplies. Meanwhile, efforts to access Mongolian coal remain stymied by severe logistical bottlenecks. From a compliance perspective, every new trade route requires careful evaluation of bilateral trade agreements, preferential customs duty rates, and compliance with rules-of-origin certificates to avoid retrospective tax demands from the Directorate of Revenue Intelligence (DRI).

Conclusion: A Multi-Front Challenge for Indian Steel

The current coking coal crisis highlights that the challenges facing Indian steel mills extend far beyond physical supply chains. The combination of high global prices, stagnant domestic product pricing, and upfront tax liabilities creates a complex financial environment. To navigate this period of squeezed margins, steelmakers must not only optimize their raw material procurement but also implement sophisticated tax planning and working capital management strategies. Ensuring compliance while managing the cash-flow impacts of IGST and ITC accumulation will be vital to sustaining India’s ambitious industrial growth targets.

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