The government’s proposal aims to increase IUP (izin usaha pertambangan) mining license royalty rates from the 3-7% to 13.5%.

IUP permits are issued by local governments to small-scale companies.

But the Indonesian Coal Mining Association warned that if the world's top thermal coal exporter instigated the plan, it could see output tumble by as much as 40% next year, according to Reuters.

Data from The Salva Report shows that Indonesian IUP coal production in 2013 to the end of May has already shown a 4.1% decrease in the share of total Indonesian coal production, falling from 29.9% in 2012 to 25.8% in 2013 thus far.

The trade group said the government should hold off on its plans for a royalty hike due to the decline in global coal prices and the hit to IUP production.

Indonesian Coal Mining Association commercial committee chairman Pandu Sjahrir said the royalty hike could cause more than half of Indonesia's miners to operate at a loss, leading many to halt production.

"It's cheaper to shut down production than to run a business at a loss," Sjahrir said, adding that the industry group would support a royalty hike of 1.5% but only after coal prices recovered and were trading at $100-110 a ton.

The proposed royalty increase comes at a tense time for Indonesian thermal and low rank coal producers as they await a final decision from the Chinese government on a proposed lignite import ban that would most heavily impact Indonesia, which provides 97% of the fuel to China.