Electricity Under GST: Clarificatory Circular cannot Override Constitutional & Statutory Protections

Electricity is a vital necessity, powering homes, businesses, and industries across India. For years, it has been exempted from indirect taxes like Service Tax and Goods and Services Tax (GST) due to its critical role in daily life. This exemption is rooted in India’s Constitution and laws, which treat electricity differently from other goods and services. However, a recent circular from the Central Board of Indirect Taxes and Customs (CBIC) has caused concern by suggesting that electricity charges recovered by landlords from tenants could be taxed under GST. This raises serious questions about whether an administrative circular can override constitutional and legal protections, potentially impacting businesses and consumers. This article examines the issue, exploring the legal framework, the circular’s implications, and whether it oversteps established boundaries.

Electricity and the GST Framework: Legislative Position

Under the Indian Constitution, taxation powers are meticulously divided between the Union and the States. Article 246, read with the Seventh Schedule, clearly demarcates legislative authority. Entry 53 of the State List exclusively empowers states to levy tax on the consumption or sale of electricity. Meanwhile, residuary powers under Article 248 and Entry 97 of the Union List are restricted from encroaching upon areas specifically reserved for states.

Consistent with this framework, electricity has been kept outside the purview of GST. Notification No. 12/2017-Central Tax (Rate) explicitly exempts transmission and distribution of electricity from GST. This exemption recognizes electricity not merely as a commodity, but as a critical public utility that deserves protection from indirect tax burdens.

The CBIC Circular: A Shift in Administrative Interpretation

The CBIC circular introduces a controversial reading of the GST law. It states that when landlords recover electricity or water charges from tenants, even if billed separately, such recoveries may be treated as part of the composite supply of rental service and hence be taxable.

This assertion is problematic on multiple grounds. Firstly, such reimbursement arrangements do not fall within the definition of a “supply” under Section 7 of the CGST Act, 2017. The landlord, in such cases, acts as a channel between the utility provider (typically a DISCOM) and the tenant. There is no consideration or commercial intent only a pass-through of actual expenses.

Judicial Precedent: Circulars Cannot Override Law

The Indian judiciary has repeatedly held that circulars and administrative instructions cannot override statutory or constitutional mandates. In Commissioner of Central Excise v. Ratan Melting & Wire Industries (2008) 13 SCC 1, the Supreme Court ruled that circulars contrary to statutory provisions are not binding. It is well settled that the executive cannot impose tax liabilities without legislative sanction.

Further, any punitive or tax-enhancing circular cannot be applied retrospectively unless explicitly allowed. The CBIC’s attempt to tax electricity charges through a circular, without changes to the CGST Act or its notifications, violates this principle. Such actions also raise concerns about fairness, as taxpayers expect clear and predictable rules. Landlords and tenants who followed the existing exemption could now face unexpected tax demands, interest, and penalties, leading to costly legal battles.

Composite Supply Argument: A Misapplication

The CBIC attempts to invoke the concept of “composite supply” under Section 2(30) of the CGST Act, which refers to naturally bundled supplies supplied in conjunction with each other. However, this doctrine fails in the present context. The mere co-existence of electricity charges with rent does not make them naturally bundled.

Electricity is consumed independently by the tenant and supplied by a third party. The landlord’s role is merely administrative. Arguing that it forms part of the principal supply of renting premises stretches the doctrine of composite supply beyond recognition and invites unnecessary litigation into an otherwise routine and transparent business practice.

The CBIC’s interpretation could significantly affect the real estate sector. In many commercial and residential leases, landlords recover electricity costs based on actual usage, often through sub-meters or direct DISCOM bills. If these charges become taxable, landlords may need to register for GST, issue tax invoices, and maintain detailed records for what were previously simple transactions. This added burden could increase costs, which landlords may pass on to tenants, raising rental expenses and affecting affordability.

Implications for the Real Estate and Leasing Sector

This interpretative shift has deep implications for real estate developers, landlords, and hospitality businesses. Standard commercial arrangements involving reimbursements could suddenly become taxable, potentially with retrospective effect. It opens the door for unwarranted tax demands, interest liabilities, and protracted litigation distorting business certainty and undermining trust in tax administration.

What makes the situation even more alarming is that the circular does not merely interpret the law; it seeks to expand the taxable base without any legislative amendment. This sets a troubling precedent for taxation by executive fiat, which is fundamentally at odds with a rule-of-law-based fiscal system.

Conclusion: A Constitutional Overreach?

The imposition of GST on electricity reimbursements via administrative circular challenges the very foundations of India’s fiscal federalism and statutory interpretation. Electricity, as a subject matter, is expressly assigned to the State List. Its exemption from GST through valid notifications only reinforces this constitutional design. For an administrative body to extend tax liability by reinterpretation without legislative authority or amendment raises fundamental questions.

From a policy standpoint, the government must address this ambiguity. If taxing electricity reimbursements is the goal, it should be done through clear legislative amendments, with input from states to respect their constitutional rights. Alternatively, the CBIC could revise or withdraw the circular to align with existing exemptions, restoring confidence among taxpayers.

This raises an important question is the CBIC merely offering a clarification, or is it stepping into the role of a lawmaker without proper authority? In its attempt to expand the tax net, is it going beyond what the Constitution allows and putting unfair pressure on taxpayers? Until the courts weigh in, we must reflect on whether this circular signals a deeper shift where tax authorities start imposing new liabilities not through law, but through administrative instructions. If so, it’s worth asking: is this a case of clarifying the law, or quietly bending it?