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Taxation of Electricity in India

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.

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

VAT and CST are applicable on sale of goods. 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. 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.

The Central Sales Tax Act, 1956 in its charging section (Section 6) clearly excludes electrical energy from levy of tax under the Act.

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.

Source:

1Wikipedia – https://en.wikipedia.org/wiki/Electricity_sector_in_India. Capacity as at Feb 2017

2 Refer Supreme Court judgement by the Constitutional bench in the case of National Thermal Power
Corporation – 2002 taxmann.com 2376 (SC)

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