GST Guidance Note

on
Power

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 INDEX

1 Overview

2 Existing taxation

2.1 Taxes on output i.e. electricity

2.2 Taxes on key inputs

3 Key changes in GST

3.1 Taxes on key inputs

3.2 Taxes on output i.e. electricity

3.3 Key challenges in GST

4 Frequently Asked Questions (FAQs)

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1 Overview
A robust and developed infrastructure is essential for sustained growth of the Indian economy. Power
is one of those critical components of infrastructure, which can significantly impact the economic
growth of India. Indian power sector can be classified under two major segments:

Power generation
Power transmission and distribution

I Power generation

India is the third largest producer of electricity and the fourth largest consumer of electricity and has
the fifth largest installed capacity. Power generation is carried out by Government undertakings (both
Central & State) and also private entities. In addition, captive generation of power is also undertaken
by various business enterprises.

Indias power sector is amongst the most diversified and the sources of power generation range from
conventional sources such as coal, lignite, natural gas, oil, hydro and nuclear power to viable non-
conventional sources such as wind, solar, agricultural and domestic waste, etc.

Sources of power generation (End Jan 2017)

Fuel MW % of Total

Thermal

Coal 188,488 59.9%

Gas 25,329 8.1%

Oil 838 0.3%

Total - Thermal 214,655 68.2%

Hydro (Renewable) 44,189 14.0%

Nuclear 5,780 1.8%

Renewable energy sources* 50,018 15.9%

Total 314,642
* Includes Small Hydro Project, Biomass Gasifier, Biomass Power, Wind Energy

Source: Ministry of Power, Govt. of India

[http://powermin.nic.in/en/content/power-sector-glance-all-india]

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II Power transmission & distribution:-

While the power generation segment has seen a progressive increase in participation by private
business entities, the activities related to power transmission & distribution continues to be
predominantly carried out by Government enterprises and State Electricity Boards.

There are States in various regions of India having surplus or deficit electricity generation. Hence
there is either an export or import of power amongst different States.

2 Existing taxation
It is judicially settled that electricity is goods and electrical energy can be transmitted, transferred,
delivered and possessed in the same way as any other moveable property; the difference being
electricity cannot be stored unlike other moveable goods. The courts have further held that in case of
electricity, all the three phases i.e. sale, supply and consumption take place simultaneously.

2.1 Taxes on output i.e. electricity

Central Taxes:

No levy of excise duty on production of electricity

No levy of CST on inter-state sale of electricity.

No service tax on generation of power on job work if used in goods on which appropriate
duties are paid by the principal [covered under mega exemption - Sl. No. 30 (c) of
notification no. 25/2012-ST]

No service tax on transmission or distribution of electricity by an electrical transmission

or distribution utility [covered under negative list of services - Section 66D (k)]

State Taxes:

VAT is not being levied on local sale of electricity under State VAT Acts.

Entry tax is not being levied on electricity

Duty on consumption or sale of electricity is being levied by States as Electricity Duty

[Entry No. 53 of the State list of Seventh schedule to the Constitution of India]

o Electricity duty is levied by States under the respective State Electricity Duty Acts.

Duty levied is either on ad-valorem basis or at specific rates

Duty rates differ based on end use, such as agriculture, household, industrial,
etc.

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 Certain States grant exemption on electricity used for agricultural purposes.

o Estimated electricity duty collected by States in 2015-16 is Rs. 28,415 Crores

[1.95% of total tax revenues of Rs.14, 54,731 Crores].

Rs. In Crs Rs. In Crs

Maharashtra 7,150.00 Andhra Pradesh 190.14
Gujarat 5,800.00 Kerala 189.06
Madhya Pradesh 2,200.00 Uttarakhand 175.00
Punjab 2,050.41 Telangana 163.09
Rajasthan 1,782.04 Bihar 102.50
West Bengal 1,660.22 Assam 58.38
Chattisgarh 1,400.00 Meghalaya 1.98
Tamil Nadu 1,219.34 Tripura 0.07
Karnataka 1,150.74 Manipur 0.06
Uttar Pradesh 1,000.00 Nagaland 0.05
Odisha 844.80 Arunachal Pradesh -
J&K 529.02 Goa -
Himachal Pradesh 308.45 Mizoram -
Haryana 240.00 Sikkim -
Jharkhand 200.00 UT of Delhi & Pondy -
Total 28,415.35

Source: State Finances - A study of Budgets of 2015-16 published by Reserve

Bank of India

2.2 Taxes on inputs

Primary inputs:

The existing taxes on common fuels are as follows:

Fuel Existing taxes

Central Excise VAT
Natural Gas Nil Commonly 12.5%;
Range 5- 26%;
Coal 2% without tax credit/ 5% (declared goods)
6% with tax credits
Furnace Oil & 14% Commonly 12.5%;
Naphtha Range 5- 20%
Light Diesel Oil 14% + Rs. 2.50 per Litre Commonly 12.5%;
Range 5- 20%

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 Clean Energy Cess @ Rs. 400/- per MT is levied on coal. This Cess is not eligible for
credit.

Fuels for use in generation and distribution of power are commonly purchased on CST
@ 2% against Form C.

Local purchases of goods (including inputs, fuel, consumables, etc.) are subjected to
VAT in almost all States. Coal being a declared good, VAT charged by State
Governments cannot exceed 5%. VAT paid on these goods is not eligible for ITC and
therefore becomes a tax cost.

In addition, water cess, royalty on coal, are also levied

Other goods & services

In respect of specified goods used in setting up, expansion of specified power projects
(eg. Ultra Mega Power, Mega power projects, renewal energy projects etc), duty
exemptions are available under customs (incl. CVD) (Notification No.12/2012- Cus, dt
17.03.2012 - Sl No.507 and 508) either in full or in part. Similar duty exemptions are
also available under Excise (Notification No.12/2012-CE, dt. 17.03.2012 - Sl No.337,
338 and 339).

Excise duty exemptions are also available on goods supplied to Power Companies under
contracts awarded under International Competitive Bidding. (Notification No.12/2012-
CE, dt 17.03.2012 - Sl No.336)

However duties paid on import of goods or excise duty paid on indigenous goods
(including inputs for use in manufacture of power eg. coal) results in additional tax cost
to these power companies.

Local purchases of goods (other than primary inputs) are subjected to VAT in almost all
States. However Iron and steel structural items are declared goods on which VAT
cannot exceed 5%.

Power generation and distribution companies also procure other goods for use in power
generation against Form C @ 2%.

The Power companies also suffer additional tax cost of service tax paid on services
received by them, since they cannot claim Cenvat Credit of such taxes.

Entry tax paid on goods add to tax costs of the sector.

In brief, under the current tax regime, the cascading effect of input taxes, as discussed above, results
in an increase in cost of power. Since power is a major input to various industries, the overall
competitiveness of Indian industry suffers to this extent.

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3 Key Changes in GST
3.1 Taxes on inputs

Primary inputs:

The taxes on common fuels post GST are expected to be as follows:

Fuel Central VAT Likely GST

Excise
Natural Gas Nil Commonly 12.5%; No levy of GST; but
Range 5- 26%; input burden of
taxes may go higher
Coal 12%
Furnace Oil, Naphtha 18%
Light Diesel Oil No levy of central excise / VAT 18%

Clean Energy Cess @ Rs. 400/- per MT is currently being levied as a duty of excise on
coal. Under the amended Entry No. 84 of Union List, such Cess cannot be levied. Under
GST regime, cess on coal up to Rs. 400/- per MT will be levied and collected under Sec
8 of the Goods and Services Tax (Compensation to States) Act, 2017, for a period of
five years or for such period, as may be prescribed on the recommendation of the
council.

Inter-state supply of fuels (other than Natural gas) may be subjected to IGST at normal
rates. In case electricity is not subjected to GST, the tax costs will significantly go up.

Even though duties and taxes under current levies would continue on Natural gas, unless
power plants can procure natural gas on CST @ 2% against Form C, tax costs will
increase.

Other goods & services

Customs duty exemptions for import of specified goods used in setting up, expansion of
specified power projects (eg. Ultra Mega Power, Mega power projects, renewal energy
projects etc) may continue. However the exemptions may be limited to basic customs
duty (BCD) only and exemption from IGST may not be available.

Currently duty exemptions available under excise laws is more than exemptions
available under VAT laws. Under GST, it is reported that exemptions are being pruned
down in line with exemptions currently available under VAT laws. Since currently no
exemptions from VAT is available to the goods supplied to power projects, there is an
apprehension that under GST regime, these supplies may be taxable.

Under the current CST laws, the power generation and distribution companies can
procure goods for use in generation and distribution of power @ 2% against Form C.

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 Tax on such purchases can go up significantly under GST regime, since IGST may be
applied at normal rates on these supplies.

Tax on services received by power companies will be higher, in case the rate of GST on
services is higher than the current rate of service tax.

In short, taxes on goods and services procured by power companies in the GST regime may
be higher and unless ITC is available to these entities or input taxes are refunded, the tax
costs may go up significantly. This increase in cascading of taxes will have a negative impact
on the sector. The power companies may consider increasing the price of electricity, which
will impact users of electricity.

3.2 Taxes on output i.e. electricity

GST on electricity:

Constitutionally the proposed GST bill allows the levy of GST on all goods, other than
those specified. Electricity is not amongst those goods, which are specifically excluded.

However the Constitutional entry relating to electricity duty (entry 53 in State List) has
not been omitted. Thus it appears that either Electricity may be completely exempted
from GST or be subjected to a small levy of GST (to allow passing of tax credits).
Electricity duty at existing rate or revised rate is likely to continue in either situation.

As far as captive power plants are concerned, there will not be any tax impact with GST
coming into force, as input tax credits will continue to be available as the generation of
electricity within a registration will not amount to supply.

However, a decision not to levy GST on electricity will result in a situation where
different industries will be impacted differently. This may neutralize much of the gains
from GST and take the sheen out of GST. In case electricity is not subjected to GST, the
impact on different classes of power-users / producers will be as follows:

(a) Depending on whether captive power plant or sourced from outside: Power
plants can be set up as captive units within the factory of production or may be
sourced from an independent power producer. The captive power plants, being
within the factory of production, will continue to enjoy the benefit of GST paid
on their inputs, input services and capital goods, whereas those sourcing the
same power from an independent unit would be denied this benefit.

(b) Depending on raw material used: Power is produced from a number of raw
materials, some of which are likely to be within GST e.g. coal, coal-based gases,
furnace oil, and others outside e.g. natural gas. Thus depending upon the raw
material even the captive power plants will be impacted differently;

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 (c) Impact on alternate sources of energy: This will also impact energy from
alternative sources, which are sunrise sectors and heavily rely on huge capex and
input sources.

Subjecting electricity to GST will help remove the current cascading of input taxes in
power sector, improve its competiveness and enable overall economic growth.

Electricity duty on electricity:

However since electricity duty, currently levied and collected by the States, has not been
considered in revenue calculations of the base year and since Entry no. 53 of State List
in Seventh Schedule to the Constitution will continue even post GST, States may
continue to levy electricity duty, even if electricity is subjected to GST.

3.3 Key challenges in GST specific to power sector

While there are no two views that subjecting power to GST would be in the interest of the sector, the
consumers and also the economy as a whole, the power sector would face certain challenges under
GST:

Increased cost of energy projects

Under the current indirect tax regime, various concessions and exemptions are available for
setting up energy projects, especially in the renewable energy space to counter such cascading
effect. However, there is no clarity on whether these concessions/ exemptions will continue under
the GST regime.

Exemption available to in-transit sales has been helpful to the power sector in minimizing the
tax costs in respect of EPC contracts under current tax regime. Under the GST regime, such
concessions are not likely to be available, which will result in increase in project cost, unless
input taxes are creditable / refundable.

Impact on renewable energy

Owing to the higher set up costs of renewable energy projects, tariff rates for clean energy are
generally not competitive vis--vis conventional energy. With a view to encourage clean energy,
multiple tax concessions and exemptions have been extended to the renewable energy sector,
thus enabling green energy to be made available at reduced tariff rates. However, there is no
clarity on whether such benefits would be extended under the GST regime.

Procurement of Non-GST goods

Natural gas used in power plants are currently procured on CST basis at a concessional rate of
2% against Form C. While natural gas would continue to be subjected to current or revised
(wherever so done) duties and taxes even after GST comes into force, in case electricity is
subjected to GST, the power plants may not be able to procure natural gas on CST basis at the

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 concessional rate of 2% against Form C. As the model GST law does not provide for a person
(registered under GST) to take credit of taxes and duties paid under the existing laws on Non-
GST inputs, there will be an increase in cost on this account.

Issues under existing power purchase agreements

Power Purchase Agreements (PPAs) generally provide for contract prices to be adjusted on
account of any 'Change in Law' clauses under the PPAs. Introduction of GST would be a
'Change in Law' under most PPAs. However, in respect of those PPAs that do not provide an
adjustment to cover change in law, the introduction of GST could pose challenges on the
contract prices and pass through of taxes.

Further, ambiguity remains in cases where GST is brought into force after the pre-bidding stage
of a project but before the signing of the PPA. In such a situation, an issue may arise on
whether GST would be considered as a 'Change in Law'.

4 Frequently Asked Questions (FAQ)

Q.1 Can GST be levied on electricity?

A.1 As per the definition of goods and services tax in the Article 366 (12A) to Constitution of
India, read with the statement of objects and reasons presented with GST Bill, GST can be
levied on all goods, other than alcohol for human consumption. Since electricity is goods,
it appears there is no constitutional bar to levy GST on electricity. Moreover electricity has
not been excluded from immediate taxability like petroleum products or from the definition
of supply or made a non-supply under Schedule III of the Central, State and UT GST Act.

Q.2 Entry no. 53 of State List of Seventh schedule to Constitution granting States the power
to tax consumption or sale of electricity has not been deleted or amended. What does
this signify?

A.2 Electricity duty, currently levied and collected by the States, is not considered in the revenue
calculations of the base year, for the purposes of compensating the States towards any loss
of revenue arising on account of implementation of GST. In view of the above and since
Entry no. 53 of State List in Seventh Schedule to the Constitution will continue, States may
continue to levy electricity duty, even if electricity is subjected to GST.

Q.3 What is the meaning of continuous supply of goods? What is its relevance to
electricity?

A.3 Continuous supply of goods means a supply of goods on continuous or recurrent basis,
under a contract, whether or not by means of a wire, cable, pipeline or other conduit, and for
which the supplier invoices the recipient on a regular or periodic basis. Since the supply of
electricity is done by means of a wire or a cable, on a continuous or recurrent basis and the

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 supplier invoices the recipient on a regular or periodic basis, supply of electricity would be
continuous supply of goods.

Q.4 In a scenario, electricity is subjected to GST, can we say that will there be no cascading
of input taxes?

A.4 If electricity is subjected to GST, there may still be cascading of input taxes. This cascading
is on account of input tax credit (ITC) that will not be available on quantity of electricity lost
/ stolen. Further, in case, specified categories of supply of electricity is exempted from GST
e.g. agriculture etc., there will be restriction of ITC on inputs used in making such exempt
supplies. Electricity will also not be entitled to get State taxes paid on Natural gas wherever
so used.

Q.5 Under GST regime, will there be GST on transmission and distribution of electricity?

A.5 Currently, transmission and distribution of electricity by an electricity transmission or

distribution utility is covered under negative list of services (Sec 66D (k) of Finance Act,
1994) and hence not liable to service tax. The services which will be exempted under GST
are yet to be notified. In case GST is levied on the supply of services related to transmission
and distribution of electricity, the entities engaged in such transmission and distribution will
be in a position to take input tax credit on their input supplies.

In terms of Sec 65B (23) of Finance Act, 1994, electricity transmission or distribution
utility means the Central Electricity Authority; a State Electricity Board; the Central
Transmission Utility or a State Transmission Utility notified under the Electricity Act, 2003
(36 of 2003); or a distribution or transmission licensee under the said Act, or any other entity
entrusted with such function by the Central Government or, as the case may be, the State
Government.

Q.6 Can the transmission and distribution entities avail input tax credit on towers erected
for transmission and distribution of electricity?

A.6 In terms of Explanation to Sec 17 of CGST Bill, the expression plant and machinery means
apparatus, equipment, and machinery fixed to earth by foundation or structural support that
are used for making outward supply of goods or services or both and includes such
foundation and structural supports. However land, building or any other civil structures,
telecommunication towers and pipelines laid outside the factory premises have been
specifically excluded from plant and machinery.

Therefore, the transmission and distribution entities could take input tax credit on towers,
including civil foundation upon which electricity towers are erected.

Q.7 Would valuation of electricity for the purposes of levy of GST include electricity duty?

A.7 In terms of Sec 15 (2) of the CGST Bill, 2017, the value of supply shall include any taxes,
duties, cesses, fees and charges levied under any law for the time being in force other than

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 the Central Goods and Services Tax Act, the State Goods and Services Tax Act, the Union
Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to
States) Act, if charged separately by the supplier.

Where electricity duty is charged separately by the supplier, such duty shall be included in
the value of electricity for the purposes of levy of GST.

Q.8 What will be the basis of valuation of electricity for use within the group entities?

A.8 If electricity is subjected to GST, value of electricity supplied to group entities, who are
related persons, will be in terms of Sec 15 (4) of CGST Act read with Rules for
determination of value of supplies. The Rule provides for valuation under different
circumstances i.e. either under Rule 2 or under Rule 4 or under Rule 5, as is applicable.

Q.9 What will be the taxability of steam generated in the power plants?

A.9 In the generation of power, steam may also be generated. Such steam could be used either
captively or could be supplied to any other person. On the captive consumption of steam,
GST will not be applicable. As steam is a GST good, supply of steam for a consideration to
another person, will be liable to GST.

Q.10 Where electricity is exported, whether refund of GST on inputs will be available?

A.10 Export of electricity is a zero rated supply in terms of Sec 16(1) of IGST Act. The supplier
can export electricity under bond or letter of undertaking, without payment of IGST and
claim refund of unutilised input tax credit. This refund of unutilised input credit would be
available, even if electricity is not subjected to GST.

Q.11 What will be taxability in respect of job work of electricity?

A.11 In terms of Sec 143 of the CGST Bill, a principal can send inputs without payment of tax to
a job worker for undertaking a process to generate electricity and bring back electricity after
completion of job work to any of his place of business, within one year, without payment of
tax.

Q.12 Will there be any reversal of ITC for captive use of electricity?

A.12 Only when electricity generated captively is used by the registered person, partly for
effecting taxable supplies (incl. zero rated supplies) and partly for effecting exempt supplies
(e.g. within residential colony), there will be a reversal of input tax credit. In terms of Sec 17
(2) of CGST Bill, ITC shall be restricted to such input tax as is attributable to the taxable
supplies (incl. zero rated supplies)

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