The government’s decision to keep electricity out of the ambit of the proposed goods and services tax (GST) would inflate the cost of power to consumers between 6-18% with the worst hit to be solar and wind power companies, experts and sources from the industry said. This is because these companies would have to pay GST for their inputs such as fuel and machinery but won’t be able to get these taxes refunded given that their output — electricity— is exempt.
Companies have therefore demanded that electricity be taxed in the GST regime, in what seems a curious irony. Alternatively, they suggested “zero-rating” of their output with the facility of refund of input taxes as in the case of exported goods.
Power generated in the country is now subject to electricity duties levied by the state governments at different rates. These duties are paid by the consumers, while captive power for self-consumption is exempt in some cases. The electricity duty is likely to remain in the GST regime. Currently, inputs for electricity generation are subject to excise/VAT levies (at concessional rates in some cases) but corporate groups are largely able to offset the input tax costs against tax liabilities on outputs other than power and indeed in case of captive power, an input by definition.
The tax incidence on thermal power could increase from around 12% now to about 18-20% under the GST, experts said. The burden would be higher for renewable firms as bulk of capital costs – investments in equipment- form bulk of their operational expenses, with labour being a tiny factor. “The increase in cost of electricity (in the GST regime) could be maximum for the renewable sources such as the solar and wind. Solar panels, wind turbines, towers, and all other inputs would attract GST at the rate of 18%, with no benefit of input tax credit. This would directly translate into a cost increase of 18%. In the case of gas and coal-based generation too, a similar scenario would prevail,” said Satya Poddar, senior tax advisor at EY.
If electricity were to be brought within the ambit of GST, as it is in virtually all international jurisdictions with modern GST, there would be no blockage of input taxes and any GST charged on electricity output would also be fully creditable to industrial and commercials users, effectively resulting in zero-tax on business-to-business supplies of electricity, experts said.
“In the GST regime, power companies would be at a disadvantage because electricity generated us not part of the proposed regime. This would increase the cost of electricity production, as the inputs and consumables costs are tend to go up by about six to 8%. And this can create an inflationary tendency in the economy since electricity is widely used in all supplies of goods and services. The solution could be to bring electricity under GST regime and make it zero rated, so that power companies could claim input tax refunds,” said Sachin Menon, national head of indirect tax at KPMG in India.
According to Hemal Zobalia, partner at Deloitte Haskins & Sells LLP, the problem of credit of input taxes being not entirely available is even now there with the power industry. He, however, said the problem could aggravate in the GST as the comprehensive system could bring more inputs under tax and the rates could increase.
Currently, India has 250 GW of installed generation capacity. Of this, nearly 130 giga watts is produced by thermal plants using coal or natural gas. The balance are from solar, wind, hydro and nuclear sources. Although natural gas is kept out of GST, there could be taxation by states that would end up as a cost to the power producers.
In and Out
Electricity could cost 6-18% more after GST roll-out due to non-availability of input tax credit to firms.
Steeper cost increases in case of renewable energy firms given they spend chiefly on equipment.
Industry demands inclusion of electricity in the GST ambit to offset the taxes paid on inputs.