Taxation of Electricity in
India
Prepared by Abhay Kumar Singh
16SBSBA11046
BBA Sem-5
Under Guidance- Hetal Upadhaya
Introduction
India is world’s 3rd largest producer of electricity, with an
installed capacity of 315 GW1.
India is world’s 3rd largest producer of electricity, with an
installed capacity of 315 GW1. In this article we try to
understand what is the legal structure in India currently w.r.to
taxation of electricity and applicability of various taxation laws
with reference to specific provisions in brief as they apply today.
Typically, electricity is generated in a power plant, transmitted
through grids controlled by transmission utilities (eg – KPTCL
in Karnataka) and distributed to consumers through
distribution utilities (eg – BESCOM in Bangalore, BEST in
Mumbai, BSES in
Delhi)
What does our Constitution say?
“Electricity” is covered under entry 38 of Concurrent list,
whereas “taxes on consumption or sale of electricity” is
covered under entry 53 of State list stipulated under A.246 of
the Constitution.
That means taxation on consumption or sale of electricity is
exclusively under States’ legislative jurisdiction.
Specific legislations on electricity
Currently, legal framework on electricity is primarily
governed by The Electricity Act, 2003 which is a central Act
and covers:
Liberalising electricity generation including captive
generation
Licensing for transmission and distribution
Conditions, regulations relating to generation, transmission
and distribution
Grid standards
Tariff determination by Electricity Regulatory Commissions
(set up at state-level and
National level) and tariff regulations
Setting up judicial system etc.
Tariff Policy Setup:
The electricity tariff policy has been laid down to ensure that
electricity is available to consumers at reasonable and
competitive rate and to ensure that there is financial
viability of the power sector.
The policy ensures transparency and promotes competition
and efficiency in the operations.
Cross Subsidy:
As a substitute to the cross-subsidy, state
government uses tax and duty to give subsidy to the
needy consumers.
Different duty or tax is charged for different
consumer categories.
With the collection of this duty, government
manages the finances for the subsidy that is
provided to the needy consumers.
Tax on consumption or sale of
electricity
Tax on consumption or sale of electricity is levied by States
through specific legislations.
For example, in Karnataka – The Karnataka Electricity
(Taxation on consumption or sale) Act, 1959 levies tax at 6%
(ad-valorem) on sale / consumption of electricity.
This tax is charged by the electricity distributors (such as
BESCOM, MESCOM) to consumers. You would notice this
in your monthly electricity bill.
Other states either charge either based on value or based
on units sold / consumed.
Excise duty on electricity
Excise duty is levied on ‘manufacture’ of ‘excisable goods’.
Entry 53 of State list in the Constitution empowers states to
levy tax on ‘consumption’ or ‘sale’ but does not specify
‘manufacture’ or ‘generation’ of electricity.
Excise duty is levied on the activity of manufacture and sales tax
/ value added taxes are levied on the activity of ‘sale’.
These two activities can be sensed as distinct from each other
for tangible goods, but not for electricity!
This is because generation and consumption is almost
instantaneous for electricity.
There have been judicial pronouncements2 settling that
electricity is ‘goods’ though not tangible.
In the Central Excise Tariff Act, 1985, tariff entry 2716
0000 states “Electrical energy”, and there is no rate
specified against this item. Due to this, electrical energy
would not be ‘excisable goods’ under the Excise law
and therefore no excise duty is payable on manufacture
or generation of electricity.
VAT and CST on electricity
o VAT and CST are applicable on sale of goods.
o As stated above, it is clear based on judicial precedents, electricity
is construed as ‘goods’ being moveable property. State VAT laws
normally specify that electricity is not taxable.
o For example, Karnataka Value Added Tax Act, 2003 has specified
‘electrical energy’ in the list of goods exempted from tax under the
First Schedule; Maharashtra Value Added Tax Act, 2002 has
specified ‘electricity’ as ‘Nil’ rated goods under Schedule A.
o The Central Sales Tax Act, 1956 in its charging section (Section 6)
clearly excludes electrical energy from levy of tax under the Act.
o With this, we can conclude that VAT or CST is not applicable on
sale of electricity
Service tax on electricity
As electricity is understood as ‘goods’, there is clarity on the aspect
that it would not be covered under the ambit of ‘activity’ falling under
the definition of ‘service’ liable to tax.
Additionally, “transmission or distribution of electricity by an
electricity transmission or distribution utility” is covered in the
negative list (Section 66D of Finance Act, 1994).
Service of transmission and distribution by utilities (licensed / notified
under Electricity Act, 2003) is therefore out of service tax net.
With this, we can conclude that service tax is not applicable on
electricity including transmission & distribution by utilities.
GST on electricity
Thirteenth Finance Commission had reported that in the view of
States, electricity duties are to be excluded from GST, whereas the
Central Government had expressed importance of subsuming
electricity duty into GST.
The Task Force appointed by the Commission had specifically
recommended that power sector should be included in GST tax base
electricity duty be subsumed.
However, the 101st Constitutional Amendment Act passed in
September, 2016 to provide for legislative framework to enact GST
laws does not contain any provision to indicate that electricity would
be subsumed into GST.
While there is a specific mention that GST Council shall
recommend the date on which GST be levied on petroleum
products, there is nothing mentioned about electricity.
FAQs published by CBEC state that electricity is keptoutside
the purview of GST.
Contrary view:
A plain reading of Constitution as amended by the 101st
Amendment Act and the model GST law (released in Nov-2016)
suggest that electricity is covered under the ambit of GST.
Article 246A of the Constitution empowers Parliament and state
legislatures to make GST laws.
This Article overrides Article 246 under which the Union, State and
Concurrent listsare specified stating subject matter of laws covered
therein.
Therefore, though the entry on ‘tax on consumption or sale of
electricity’ is continued in the State list covered under Article 246,
the Article 246A overrides this as electricity is anyways ‘goods’.
The definition of goods or charging section under Model GST
law does not exclude electricity.
Given this position, it may be therefore argued that electricity
is also covered under the GST law.
Probably an entry in the exemption notification would clear
this air.
Till the time electricity is not subsumed into GST, the energy
sector would not be able to avail credits of GST paid on inputs,
services and capital goods used in sale of electricity.
There have been demands from energy sector that electricity be
covered under zero rated goods so that refund of input taxes
under GST be claimed, or that inputs be exempt for the sector.
We have to wait for the final law to be notified to see what our
law makers agree upon.
Concluding remarks
Going by the intent displayed till now by the law-makers, tax
on electricity would continue to be governed by respective
State laws, unless it is subsumed into GST.
Further, if the GST Council does not recommend exemption
for inputs in the sector or zero-rating electricity, industry and
consumers will have to bear the brunt.
