GST on Electricity: Is it wise?

 In India, the taxation of electricity presents a nuanced and multifaceted issue, blending constitutional provisions, economic considerations, and social impacts. With the Goods and Services Tax (GST) transforming the indirect tax landscape, discussions about including electricity under GST have gained traction led by industries which are likely to benefit. This blog delves into why imposing GST on electricity might not be easy and prudent, explores the constitutional provisions governing this issue, and analyses the potential impacts on domestic and industrial consumers, including the aspect of Input Tax Credit (ITC).

Why Implementing GST on Electricity might be difficult

Electricity is an indispensable commodity for both households and industries. It powers homes, businesses, and essential services, making its affordability a critical concern. Imposing GST on electricity would likely increase its cost, making it less affordable for consumers and sparking significant public opposition. India’s per capita electricity consumption is lower than that of its peer countries. Adding any additional burden on tariffs is unlikely to help increase per capita consumption, which serves as a proxy for development.

Including electricity under GST could lead to higher electricity prices, contributing to inflation. Increased energy costs translate into higher production costs for goods and services subsequently raising their prices. This inflationary trend could affect the overall economy, reducing purchasing power and impacting economic growth.

The current regulatory framework for electricity already involves multiple state-level taxes and surcharges. Adding GST to this mix could complicate compliance for electricity providers, increasing administrative burdens and possibly leading to regulatory overlap and inefficiencies.

States employ a system of cross-subsidies, where higher electricity tariffs for industrial and commercial users subsidize lower tariffs for domestic and agricultural users. Imposing GST could disrupt these subsidies, making electricity less affordable for vulnerable populations and potentially leading to social unrest.

Constitutional Provisions on Imposition of GST on Electricity

Seventh Schedule of the Indian Constitution- While Electricity falls under the Concurrent List (Entry 38), meaning both the Central and State governments can legislate on this subject, Taxes on the consumption or sale of electricity are specifically mentioned as a state subject (Entry 53). This grant states the authority to impose taxes on electricity, making it a revenue source for them, however, the shared jurisdiction on law making complicates any unilateral move to include electricity under GST.

Article 279A and the GST Council -The GST Council, established under Article 279A of the Constitution, is responsible for making recommendations on the inclusion of goods and services under GST. For electricity to be included, a consensus within the GST Council, which includes both Central and State government representatives, is required. However, before that, a constitutional amendment may be needed to levy shared taxes (GST) by the Centre and States on electricity.

Impact of GST Input Tax Credit (ITC) on Consumers & Discoms

a) Domestic and Agricultural Consumers: 

Domestic and agricultural consumers typically do not have any output tax liability, so they would not benefit from ITC. The GST paid on electricity would result in a direct cost increase, impacting affordability and straining household budgets, especially for lower- and middle-income families. This could adversely affect their quality of life and lead to a further reduction in already low per capita consumption. Similarly, the imposition of GST would increase electricity costs for irrigation and other farming activities, raising operational costs and straining the financial viability of farming, particularly for small and marginal farmers. Higher farming costs could also contribute to increased food inflation.

Moreover, the number of domestic and agricultural consumers far exceeds that of commercial and industrial consumers, impacting the political economy significantly.

b) Industrial Consumers

 Industrial and commercial consumers currently cannot claim Input Tax Credit (ITC) for the electricity duty paid, which increases their operational costs as they cannot offset this tax against their output tax liability. These consumers could benefit significantly from ITC if electricity is included under GST. They could offset the GST paid on electricity against their output tax liabilities, reducing their effective tax burden and improving cash flow. This advantage could partially mitigate the increase in electricity costs due to GST, making the tax regime more favorable for business operations.

 c) Impact on Distribution Companies (Discoms)

Including electricity under GST would increase the working capital requirements and tax liability for Discoms. They would need to pay GST on electricity purchases, which could raise operational costs unless adequately compensated by Input Tax Credit (ITC). Discoms would also face an increased compliance burden under the GST regime, requiring them to manage GST filings, ITC claims, and other regulatory requirements, which could strain their administrative resources. While Discoms could benefit from ITC on the GST paid for inputs such as equipment, maintenance services, and other operational expenses, thereby improving cash flow management and reducing overall costs if efficiently managed, any delays in realizing ITC could impact their cash flows. Additionally, commercial losses are likely to increase due to the incidence of taxes on billed but unrealized amounts. Discoms might need to pass on the increased GST costs to consumers through higher tariffs, leading to resistance from consumers and potential regulatory challenges. Non-compliance with GST regulations could result in penalties, fines, and interest charges, adding to the financial burden of Discoms. Persistent non-compliance could lead to legal issues, including audits and investigations by tax authorities, further straining the resources and reputation of Discoms. Currently, generating companies' payments are prioritized, but under the GST regime, the priority of claims would shift to GST payments.

 Conclusion

 The imposition of GST on electricity will benefit industries by allowing them to claim Input Tax Credit (ITC) and will also provide the central government with access to tax revenue on electricity currently exclusively under state jurisdiction. However, this move requires balancing the need for a streamlined tax regime against its economic and social implications. As electricity is an essential commodity, careful consideration must be given to its cost implications for households, agriculture, industries and discoms. Constitutional provisions highlight the significant role states play in taxing electricity, reflecting its importance as both a revenue source and a tool for socio-economic policy.

Any move to bring electricity under the GST regime would require broad consensus among stakeholders, including the Central and State governments. It necessitates a thorough examination of potential impacts on inflation, industrial competitiveness, and social equity.