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Electricity or Electrical Energy is one of the major source of revenue for the state governments as it comes under the state list of the Constitution wherein they are collecting electricity charges from the customers. This is one of the major contentious issues whether it would be supposed as goods or services and whether GST would be applicable on it. Further, when supply of electricity combined with some other service elements to the customers, whether tax would be payable or not on such combined supply. In this Article, we would like to discuss in details about the applicability of GST on electricity charges whether be it thermal or solar or hydro-power.

GST on Supply of Electricity

Is Supplying Electricity a Goods or Service

As per Section 2(52) of the CGST Act 2017, “Goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.

As per Section 2(102) of the CGST Act 2017, “Services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

Electrical energy is a movable property and hence, covers under the definition of goods. Supply of electrical energy is exempted vide notification for exemption of goods having notification no. 02/2017 –Central Tax (Rate) dated 28.06.2017 in Sl. No. 104 under heading “2716 00 00 – Electrical Energy”.

Further, notification no. 12/2017-CT(Rate) dated 28.06.2017. exempts the services provided by way of transmission or distribution of electricity by an electricity transmission or distribution utility.

As per clause 2(z) of the said notification (under definition part), “Electricity transmission or distribution utility” means the Central Electricity Authority; a State Electricity Board; the Central Transmission Utility or a State Transmission Utility notified under the Electricity Act, 2003 (36 of 2003); or a distribution or transmission licensee under the said Act, or any other entity entrusted with such function by the Central Government or, as the case may be, the State Government;

The transmission or distribution utilities are exempted under the said notification.

Levy of tax on electricity

  • Covered under Entry 53 of List-II of the Seventh Schedule of the Constitution of India

The power to levy taxes on consumption or sale of electricity has been provided to the State Government vide Entry 53 of List II of Seventh Schedule of Constitution.

Entry 53 of List II reads as follows:

“53. Taxes on the consumption or sale of electricity.”

However, such entry is not being subsumed and accordingly taxes on consumption or sale of electricity have been proposed to be kept outside GST. Therefore, the electricity generation would continue to be outside the GST regime and the State Government would have the power to continue to tax the same.

Entry 54 which empowers the States to levy tax on sale of goods has been subsumed under GST. The term ‘goods’ has been defined in the Constitution as ‘goods include all materials, commodities, and articles’. Given the wide definition of the term ‘goods’, it may be argued that electricity qualifies as ‘goods’. This is also supported by judicial precedents and the fact that in various State VAT laws, electricity has been included in the category of ‘exempted goods’. Also, electricity has been mentioned in the Excise Tariff. In light of the discussions, it is possible to consider electricity as goods and accordingly, technically possible to tax electricity under GST (as sale of goods).

Currently, tax on electricity is levied only under Entry 53 and it’s specifically exempted/ excluded from levy under Entry 54.

In our view, we understand that since the constitution of India separately and specifically provides for taxability of electricity as a state subject which is covered under Entry 53, then entry 54 would not come into play for electricity and hence, tax on electricity charges would be outside the purview of GST Act.

  • under earlier service tax and VAT regime

under earlier regime also, electrical energy was covered under the State VAT Act and was exempted.

In service tax, electricity transmission or distribution utility was covered under the negative list on which service tax was not applicable.

  • Under GST regime

GST is exempted on the electrical energy vide notification no. 02/2017 –Central Tax (Rate) dated 28.06.2017 whether be it thermal energy, solar energy or hydro-power or any other form of electrical energy.

GST is also exempted on electricity transmission or distribution utility by way of notification no. 12/2017-CT(Rate) dated 28.06.2017.

However, it is assumed that if electricity provided by a person other than the electricity transmission or distribution utility, it would be chargeable at the rate of 18%.

Issues of Chargeability

Supply of electricity is one of the most contentious issues in the indirect taxes. There are many issues related to it. I would like to highlight few of them and the probable solution to those queries. Details of such queries and their probable solutions are as under:

  •  Query No. 1

Whether GST applicable on supply of electricity paid by the tenant under the rent agreement of the commercial property?

  •  Probable Solution to query no. 1

(1) In the case of rental agreement, there are various supplies in addition to the renting to the space provided to the service receiver. In that case, there may be a scenario where whole amount of rent including electricity charges and other charges are paid to the service provider. The said case would be called as ‘Composite supply”.

As per section 2(30) of the GST Act, ‘Composite Supply’ means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

In the case of composite supply, in this case, renting is the principal supply and other supplies are naturally bundled and in conjunction with each other and hence all the supplies combining together would be chargeable to GST at the applicable rate.

(2) In case where there is an agreement to collect the services provided to the service recipient separately, then in that case, there is a separate treatment of tax for each case.

Thus, in our view, rent is liable to GST whereas the electricity charges collected by the service provider as a pure agent (on the basis of original electricity charges and no profit on it collected), then GST would not be levied on such electricity charges.

  • Query No. 2

Whether other services rendered by the DISCOMS are taxable?

  • Probable Solution to query no. 2

The said query has also two probable solutions in our view, which are as under:

1. As per Circular No. 34/8/2018-GST dated 01.03.2018, ancillary services rendered by the DISCOMS are taxable at the rate of 18% and following are such ancillary services:

i. Application fee for releasing connection of electricity.

ii. Rental charges against metering equipment.

iii. Testing fee for meters/ transformers, capacitors etc.

iv. Labour charges from customers for shifting of meters or shifting of service lines.

v. Charges for duplicate bill.

There are few of the AAR Judgements which held that GST would be levied on the ancillary services provided by the DISCOMS to the service receivers.

However, reconnection charges are not collected for separate service and it forms part of the principal supply. Hence, it is a composite supply (principal supply being electricity) and hence GST on such supply is NIL.

2. Second probable solution for the said issue are,

Since the ancillary services mentioned above are provided in relation to the electricity service without which said ancillary services are of no use and supply of electricity being the principal supply, the others naturally bundled in providing the electricity supply and are supplied in conjunction with each other.

In the case of Torrent Power Ltd. v. Union of India (GUJ-HC), the Hon’ble high court has quashed the said ancillary services provided in relation to the electricity by stating that it is being ultra vires the provisions of section 8 of the Central Goods and Services Act, 2017 as well as serial no. 25 in notification no. 12/2017-CT(Rate) dated 28.06.2017.

Section 8 of the CGST Act: Tax liability on composite and mixed supplies

(a) Composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply.

Section 2(30) of the CGST Act, ‘Composite Supply’ means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

Section 2(90) of the CGST Act, ‘Principal Supply’ means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary.

Hence, in our view, no GST would be levied on the ancillary services as well as it is in the nature of composite supply described as above.

Benefits of bringing electricity into GST

By bringing the electricity into the GST net by charging GST on it, the businesses definitely would get the benefits, some of them are as under:

a) Reducing the cost of manufacturing;

b) Improving the competitiveness of the exporters as well as Indian business houses also;

c) Reducing the cross-subsidisation of electricity tariffs that further undermines the competitiveness of manufacturers and exporters;

d) Eliminating the large biases and hence restoring neutrality of Incentives in electricity generation.

There may be a loss to the state and Central Governments but these losses can be shared between them and the centre may compensate the states for their losses. There would be costs in terms of the foregone revenues but the benefits would be large and states could be partially or fully compensated.


Electricity being falling under the State subject under Article VII of the Constitution of India, is outside the scope of taxability under GST. Hence, we understand that even though electricity is a goods, its taxability would not cover under the GST Act since it has been specifically covered under the State subject in the Constitution of India.

Executive Summary 

It is being clearly described the tax on supply of electricity has been covered under the state list of the Constitution of India. However, if it is to be supposed as goods, it would be covered under the GST Act. However, GST rate is ‘NIL’ on supply of electrical energy having HSN Code ‘2716 00 00’. Electricity when provided with other services, would be treated as Composite supply in our view and no GST would be charged on such composite supply. However, there were divergent views of various AARs with regard to the additional services provided in relation to the supply of electrical energy. Even then, we understand that all the additional supplies were in conjunction with the electricity supply and hence all such supplies were chargeable to NIL rate of tax.

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  1. Monu Sharma says:

    e-invoicing is mandaroty for hydro power project for sale of electricity. However electricity sale are examped form GST .

    Our turnover is above 50 Crore & nature of supply is B2B kindly advice

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May 2024