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Inclusion of Electricity in GST

December 07, 2017
8 months

What is the issue?

With transitional implementation challenges with the GST being sorted out, it is a high priority now that electricity is included in GST.

What is the current status?

  • Currently, there is a confusing multiplicity of electricity taxes.
  • Notably, the taxes vary by states and across user categories, low for consumers, high for industrial users, etc.
  • Taxes levied by the states vary from 0 to 25% and is an important source of revenue for them.
  • On average, electricity taxes account for about 3% of own tax revenues of the states, going up to close to 9% in some states.
  • States are, therefore, reluctant to give up the right to levy these taxes.

What are the concerns?

  • Costs - The most serious concern is that costs to industrial users of electricity are higher.
  • This is because they include the taxes on inputs that have gone into the supply of electricity.
  • These include taxes on raw materials (coal, renewables) and other equipment (solar panels and batteries).
  • Not being part of GST means that no inputs tax credit can be claimed.
  • This certainly results in embedding of the tax in the final price.
  • Embedding of taxes - This clearly hurts manufacturers selling to the domestic market.
  • In particular, this affects the exporters of electricity-intensive products.
  • It is because they are not liable to any duty drawback i.e. relief for taxes embedded in exports.
  • Industrial buyers of electricity bear the impact of this in an indirect way.
  • Populist politics has long ensured that consumers (and other users in agriculture) pay either nothing for electricity or very little.
  • Ultimately, discoms cross-subsidise and charge higher prices to industrial users to make up for under-charging others.
  • But the embedding of taxes adds an extra layer of cross-subsidisation.
  • Totalling up all of these effects could lead to increased costs and lower margins for several industries.
  • These margins are significant, especially for exporters who face strong international competition.
  • GST - Currently, there is a large bias in favour of renewables in GST policy.
  • Inputs to renewables generation attract a GST rate of 5% while inputs to thermal generation attract higher rates of 18%.
  • Supporting renewables might be a conscious policy.
  • But subsidisation is proliferating across policy instruments, making it difficult to quantify the overall support and is thus distorting.
  • Thus, support for renewables should be direct and transparent.
  • GST should not become the instrument for adding non-transparently to that support.

What could possibly be done?

  • GST - If electricity is included in GST, there would be no discrimination between renewables and thermal energy.
  • This is because all inputs going into both forms of electricity generation would receive tax credits.
  • Including electricity in GST would also reduce or eliminate embedded taxes in electricity-using products.
  • Loss - But both the central and state governments would lose revenues that would now accrue as input tax credits to the private sector.
  • In addition, state governments would lose taxes from electricity use itself.
  • The Centre could thus compensate the states only for the direct loss of revenues.
  • However, benefits of the reforms would be greater to be shared between the Centre and the states.
  • Implementation - To ensure that Centre does not suffer fiscal losses, the implementation with electricity should perhaps wait until GST revenues have stabilised.
  • Inclusion of electricity in the GST would thus -
  1. reduce the costs for manufacturing
  2. improve the competitiveness of exporters
  3. reduce the cross-subsidisation of electricity tariffs that further undermines the competitiveness of manufacturers and exporters
  4. eliminate biases and restore neutrality of incentives in electricity generation


Source: Indian Express

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