Inclusion of Electricity in GST

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