By Chitra Pratap and Utkarsh Anand
The GST council has reduced the tax burden on domestic coal by placing it under the 5% GST bracket from the current rate of 11-12% (6% central excise duty plus 5% state VAT). Imported coal, however, would attract basic customs duty (BCD) at 10%. Transportation from the coal mines to the factory/construction site (inter/intra state) is a costly affair due to the service tax charged at the rate of 15% on the transportation services, which is transferred onto the consumer. Under the GST, the rate on transportation services on railways (main source of coal transport) has also been reduced to 5%, thus bringing down overall power production cost.
According to ICRA, the reduction in the tax incidence of coal would result in a 3-4 paise per unit decrease in electricity generation (for domestic coal) thus making it more affordable. As on the June 11, the government has revised the rates of static convertors, transformers industrial electronics and electrical transformer, electrical filaments, from 28% to 18% tax. Hence, reduced cost of generation and distribution of coal-based electricity will improve the profitability in this segment.
On the other, hand GST may not have such a good bearing on the renewable sector. Despite India’s plan to push 175GW of renewable power by 2022, the solar and wind energy are put in a higher tax bracket than before. The solar energy sector is currently exempt from electricity duty in most states. Various charges are levied on the procurement of goods and services, however, the government in order to promote renewable energy offers concessional rates on taxes such as the BCD, excise duty exemptions etc, as per MNRE report. These incentives will reduce in the new GST regime. The tax rate on solar panels and devices will increase to 5% from the current 0%.
The wind energy sector would also face a marginally negative impact, as the rates for its components (electricity generator, rotor, wind turbine controller) would increase to 5% from the current 3-4% (assumed at 30% imported, 30% intra-state and 40% inter-state equipment), in the case of domestic goods, and current BCD would be levied on imports, as well as an additional 5% (GST), as per the ICRA report. This would increase the capital costs of new projects by about 4%. Successful passage of the GST bill, although highly beneficial to the wider economy, would marginally impact both the ongoing and new projects.
GST takes flight
With the government already putting pressure on airlines to abide by its UDAN rules (which stipulate airlines to offer cheaper fares on flights to Tier II cities), the onset of GST is expected to give a further push to this sentiment. Under the GST regime, the tax for the economy class will be at 5% from the previous 6%. For the business class flights, however, there will be an increase in the rates to 12%, which is 3% more than the existing 9% service tax rates. However, ICRA estimates that this may not have too much of an impact on air passenger growth, ie, passenger demand as the hike will be borne by high end customers.
But that may not be the troubling factor for airlines, as the real issue lies in the input credit system. In the current service tax regime, airlines can claim this credit on all input goods and services (including ATF). Under GST, for the business class it can still be availed on inputs except ATF, however, for economy class it can only be availed on input services. The burden to be borne by airlines also includes the cost for leasing aircrafts, which will increase by 5% as this was exempted earlier.
Long-duration international travel is expected to be more taxing. For stop over flights, tax will only be levied on one part of the journey, (for example, only the India-Kuwait leg of an India-Kuwait-USA flight), whereas it will be levied completely on direct flights (the whole journey on an India-USA direct flight), hence making them costlier. If the industry does absorb most of the costs, it will surely see a surge in fliers. The new regime may not favour the aviation sector, but aam nagrik will certainly approve of the decision.