Why GST should cover electricity

1. Amitabh Khemka, Chief
Operating Officer, Sthir
Advisors LLP
Why Goods & Services Tax must cover 'Electricity'
Date : August 09 2016
An historic moment occurred on August 3, 2016 with the passing of the GST
Constitutional Amendment Bill by Rajya Sabha (the Council of States /the Upper
House of the Parliament of India), laying down the path for new indirect tax
regime in India. The said Bill empowers the Union and the States to impose
goods and services tax.
Alcoholic liquor for human consumption is not part of GST. Specified petroleum
and petroleum products would be outside GST till a date notified on the
recommendation of the GST Council. Tobacco and tobacco products would
attract central excise duty, in addition to GST. Incidentally, there is no stated
clarity on applicability of GST on electricity.
The current understanding is that the electricity is not covered within the GST regime. Government of India,
while expressing its views to the Select Committee of Rajya Sabha (Report released in July 2015) on GST
Constitution Amendment Bill, had stated –
Inclusion of electricity under GST has not been envisaged ever since the First Discussion Paper was
published in 2009 on GST. Neither the Empowered Committee, nor the Parliamentary Standing Committee
ever recommended inclusion of electricity under GST. Taxes on electricity and water have been treated
separately from taxes on other goods and services in the Constitution. Entry 53 of List II (State List) deals with
taxes on sale or consumption of electricity, and this entry is not being touched by the Constitution (122nd
Amendment) Bill, 2014.
It has not been envisaged?
There is no mention of electricity in the First Discussion Paper published in November 2009. The First
Discussion Paper carves exception only for alcohol, petroleum and tobacco – all of which have been
specifically dealt within the GST Constitution Amendment Bill. Article 287 and Article 288 of the Constitution of
India provides for exemption from taxes on electricity which is consumed by Government of India or consumed
for specified purpose. Entry 53 of List II (State List) of Schedule VII to the Constitution deals with ‘taxes on
sale or consumption of electricity’; and this Entry is not being touched / amended by the GST Constitution
Amendment Bill. No alteration to Entry 53 appears to be an assumption for not considering / envisaging
electricity in the GST regime.
The Parliamentary Standing Committee on Finance (Report released in August 2013) observed the following
in this regards:
The Empowered Committee of State Finance Ministers (EC) was requested to prepare a design of the
proposed GST. …. Following several rounds of discussion between the EC and the Central Government,
certain important design parameters of GST have been agreed as follows:
- …. In terms of coverage of goods, the proposed Goods and Services Tax will not apply to five specified
petroleum products viz. …. . On these items, the Centre would continue to levy Central Excise duty (CENVAT)
while the States would continue to levy Sales tax. State excises on alcohol for human consumption and
electricity duty on sale and consumption of electricity would not be subsumed under GST to begin with.
Tobacco and its products would be subject to GST, but, they would continue to bear Central Excise duty over
and above the GST.
Shri Sushil Kumar Modi, the Chairman, Empowered Committee of State Finance Minister‘s in his post evidence
reply stated as under:
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2. - The States are in agreement that petroleum products, alcohol liquor for human consumption and electricity
should not be, for the time being, brought within the ambit of GST. Mainly this decision has been taken as
petroleum products and alcoholic liquor for human consumption are major revenue earner for the States.
Regarding electricity, the decision has been taken to keep ‘electricity’ outside the GST for the time being
only. At present ‘coal’ is under VAT, and, therefore, it has been kept under the purview of the GST.
Currently, for generation of electricity, rate is not specified in central excise duty tariff. Activity of transmission
and distribution of electricity by specified agencies / authorities is covered in the negative list of services and
hence outside the scope of levy of service tax. Electricity is exempted from state-value added tax / central
sales tax.
GST is to be levied by the Union and the States on ‘goods’ and ‘services’. Electricity being ‘goods’ and activity
of transmission and distribution being ‘service’; ‘electricity’ and such activities would have to be exempted from
levy of GST under the respective GST Laws so as not to cover it within GST regime. Vide Entry 53 electricity
duty would continue to be levied by the States on sale of electricity.
If electricity is kept outside GST, electricity generation, transmission and distribution entities would not be
eligible to claim input tax credit of GST paid on goods and services used for such generation, transmission and
distribution. Further, the industrial buyers / businesses, having GST as their output tax liability, would not be in
a position to claim input tax credit of electricity duty paid on electricity. This would continue the multi-level
cascading of taxes. Further, self-supplies by electricity entities of goods and services, other than electricity,
may attract GST, fueling further the cascading.
Electricity sector would be impacted for not being included under GST, inter alia, due to the following:
- Current exemption on equipment required for generation / transmission / distribution from central excise duty
may not continue in GST regime.
- Reduced rate of central sales tax on equipment required for generation / distribution would not continue in
GST regime.
- Rate of tax on O&M services would increase
Bids won before GST regime and fixed tariffs, if not changed, would impact profitability.
For electricity, the 13th Finance Commission (Report released in December 2009) has recommended that -
Power is one of the most important inputs in the process of production of goods and services. Hence, it is
necessary to rationalise the tax treatment of the power sector so as to ensure that there is seamless flow of
input tax credit across all the processes/activities in the power sector. …. The cumulative impact of the
taxation regime at both the Central and State level is significant cascading effect of taxes (could account for as
high as 30 percent of the cost of power production and distribution) when power is used as an intermediate
input. …. In view of the above, we recommend the following: (i) The electricity duty levied by the States
should be subsumed in the SGST. (ii) The power sector must form an integral part of the comprehensive
GST base recommended by us over which both the Central and State Governments would have
concurrent jurisdiction. (iii) The tax regime for the power sector should be the same as in the case of
any other normal good. (iv) Article 287 and Article 288 of the Constitution should be amended to enable levy
of GST on supply of electricity to Government at all levels like any other normal goods.
The inclusion of the power sector in the GST model would significantly reduce the cost of power projects and
consequently the cost of generation and distribution of electricity. As a result, it will improve profitability of
power projects thereby attracting new investments into the sector. To the extent the cost of power will witness
reduction, downstream industries will also benefit from cost savings and thus become internationally more
competitive.
The Stakeholders had suggested the following to the Select Committee of Rajya Sabha (July 2015) –
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3. Electricity must form an integral part of the GST base, as is any other normal good. It is therefore suggested
that electricity duty also be subsumed within the GST framework. This approach can reduce the cost of
electricity by 20%, significantly enhancing the competitiveness of our domestic manufacturing sector. The
GST need not be a full replacement of the electricity duty. Only a part of the duty can be replaced by
GST, which should be fully creditable to industrial/commercial users of electricity. Given that Article
246A empowers the Union and States impose GST, notwithstanding anything contained in articles 246 and
254, GST can be extended to electricity even if Entry 53 in List II – State List (Taxes on the
consumption or sale of electricity) is not omitted. Continuing this entry would allow States the flexibility to
levy a supplementary tax to electricity in addition to GST, if they consider it necessary or desirable.
As per the Empowered Committee, electricity duty was not to be subsumed under GST, only to begin with. As
per the 13th Finance Commission, electricity should be fully subsumed within GST. The Stakeholders gave
suggestion to the Select Committee, which is win-win for all i.e. the electricity companies, the industrial as well
as domestic consumers, Central Government as well as the State Government. Electricity duty could also be
levied by the States, as supplementary tax at much reduced rate as compared with current rates. Inclusion of
electricity sector would reduce the cost of power by 20% - 30%. This would not require any amendment /
change in the GST Constitutional Amendment Bill. Inclusion of electricity sector within GST may also help to
lower the Revenue Neutral Rate of GST.
Electricity should be included in the GST regime. Incidentally, the discussion on passing of the GST
Constitutional Amendment Bill has been silent on this aspect. GST is intended to provide for a common
national market for goods and services. Inclusion of electricity in GST regime may support Government’s
objective of creating one market for power. Inclusion of electricity in GST regime would provide impetus to
India’s ambitious renewable energy targets in terms of solar and wind energy.
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