The power sector in a general and practical scenario is a mesh of contracts for engineering, procurement, construction (EPC) to generate electricity, boost energy efficiency and shore up renewable power. And moreover, power generation has grown rapidly in recent years. There has been a considerable shift from fossil fuel-based energy generation to clean and renewable sources of power generation, which is evident by the growing share of renewables in the current power generation system. For the power sector in India which currently relish a multitude of tax concessions and exemptions, the advent of GST is going to bring about an exotic change. It will also bring about a transit in the trajectory of the sector and its growth. The triumph of the transition to a new tax regime will inadvertently depend upon how well the industry as well as individuals prepare in adapting to this change. The fundamental effect of exclusion of power sector from the GST regime will be pressed by the power generators who will not pay GST rates as output tax. However, inputs will be taxed under GST. Therefore, this disturb balance of not being able to claim tax credits will result in higher cost of electricity production.[i] Overall GST, hopefully will bring in greater transparency and further revolutionise the electricity sector, which is very much needed in the country.

Is Electricity A Good or Service?

Intuition would seem to make the issue of whether electricity qualifies as a good or service. After all, that electricity usage is measured in certain units (kilowatts) by a device (electric meter) that lends a great deal of common sense support for the idea that electricity must be a good.  Moreover, because electricity can be touched and moved, the conclusion that electricity is a good seems even more certain.  Despite electricity’s apparently obvious classification as a good, there exists a tremendous struggle in classifying electricity as a good or service. Article 2 of the Uniform Commercial Code (“UCC”) applies to “transactions in goods. “Under the UCC, “goods means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale…”Under the UCC’s definition there was a clear view that electricity as a good is easy to digest, given the obviousness of electricity’s classification as a thing (as opposed to a service or otherwise) and its movability.  Because a customer’s electric meter measures the amount of electricity sent from the electricity provider and consumed by the customer, electricity is movable at the time of identification—that is, a simple meter reading reflects the amount of electricity that was moved to the customer, and this amount of “moved electricity” is then used to generate the customer’s bill.[ii]

On the other hand, Public policy forms the basis of yet another argument that electricity is a service instead of a good. As a matter of public policy, some concerned about the “implications of subjecting heavily regulated utility to the UCC’s warranty remedies.” In addition to this other based their determination of whether electricity qualifies as a good under the UCC on where in the distribution chain the electricity is. If the electricity is metered, as it is when it enters a home, then these public will find it to be a good to which the UCC applies. If the electricity exists in a high-voltage transmission line, however, then people following this reasoning conclude that, nearly inexplicably, electricity is not a good under the UCC. According to the Court in Hedges, “The high-voltage electricity with which the [plaintiffs] came into contact was not the good [the utility] was intending to sell or the [plaintiffs] were intending to buy. . .. The tragic escape of 7200 volts from the transmission wire, through the ladder, and into the bodies of these men is not a transaction in goods intended to be covered by the Uniform Commercial Code.”  The Hedges Court seemed to focus more on the existence of a transaction as opposed to the characteristics of electricity. The ramifications for when a court concludes that electricity is a good for UCC applicability is significant.[iii]

Why GST Must Cover Electricity?

As the Goods and Services Tax (GST) overcomes the transitional implementation challenges, it is time to look ahead to further improving it. The impact of the highest rates has been reduced by substantially paring down commodities in the 28 per cent bracket. The simplification of procedures for small enterprises, especially those that sell to large enterprises, is under way. Bringing land and real estate into the GST is on the agenda for discussion. High priority must now also be accorded to the inclusion of electricity in GST. Why, how, and when? Currently, there is a bewildering multiplicity of electricity taxes that vary by states and across user categories, low for consumers, high for industrial users. Taxes levied by the states vary from 0 per cent to 25 per cent. It is an important source of revenue for them, amounting to about Rs 31,000 crore for all the states combined. On average, electricity taxes account for about 3 per cent of own tax revenues of the states, going up to close to 9 per cent in some states. States are, therefore, reluctant to give up the right to levy these taxes. But the status quo imposes costs that undermine the government’s Make in India initiative.[iv]

Another argument calls for the inclusion of electricity in GST. Currently, there is a large bias in favour of renewables in GST policy. Inputs to renewables generation attract a GST rate of 5 per cent while inputs to thermal generation attract higher rates of 18 per cent. Supporting renewables might be conscious policy (and also good policy) but we are in a situation where subsidisation is proliferating across policy instruments, making it difficult to quantify the overall support. As we have discovered, complexity in GST rate structure arises because it is burdened with having to meet multiple objectives. Support for renewables should be direct, conscious, and transparent. GST should not become the instrument for adding (non-transparently) to that support. If electricity were to be included in GST, then there would be no discrimination between renewables and thermal energy because all inputs going into both forms of electricity generation would receive tax credits. GST would then become neutral between different forms of electricity generation as good tax policy should be.[v]

Impact Of GST On Power Sector

The Power Sector in India is as complex and chaotic as the near infinite, tangled, electricity lines that connect the homes of India. This paper deliberates on the crucial cogs in the power sector machinery, which are power production, transmission and distribution. Each component is vital to not only to the power sector, but to sustaining the Indian economic powerhouse. Each component is intricate, and face fundamentally specific challenges. Almost one and a half decades ago, the Government of India propelled an ambitious National Electricity Policy. It envisioned for “electric power for all by 2012”. The policy came and the year, 2012 has gone by, however, electricity has not reached all the homes as promised. Rather, this policy missed the mark by nearly 60%. Though India is the world’s third largest electricity producer, after U.S., China and Japan, its per capita consumption fares amongst the lowest in the world.[vi] Electricity distribution is the final component of the value chain and the most important as it links the end consumers with the rest of the value chain. This is an inherently complex element of the power sector. It is also considered the weakest given the present health of discoms in the country.

The power sector is essentially a mesh of contracts for engineering, procurement, construction (EPC) to generate electricity, boost energy efficiency and shore up renewable power. Yet, input tax credit would not be available on EPC contracts, with electricity outside the GST regime. Further, the Finance Act of 1994, in section 66D, lists transmission and distribution (T&D) of electricity in the negative list of services. Also, some of the distribution vendors are not included in the GST regime and it may impact their business as well. Discoms or distribution franchises (which are trying to bring in efficiencies in the system) stand to lose because they would no longer get input tax credit. This means they will have to pay tax on everything they buy (goods and services) but can’t set it off against the GST they bill. Therefore, their own profitability may be hit slightly. One way out could have been to impose a nominal GST on electricity (say 3 percent, as on gold biscuits) so that electricity at least comes into the tax chain, pay their fair share, and the distributors can claim input tax credit.

Will GST Affect Electricity Bills?

Electricity is considered under energy…Our job is to push the government to get GST and electricity under the GST Act. If the government can do it, then it is fine. Electricity duty is charged on consumption and is mostly a rate that is applicable per unit of electricity consumed. So higher the number of units, higher will be the electricity duty amount. In some states it is also applied as percentage of total charges (electricity usage + fixed charges) and in some states both are applicable. So, the best way to reduce this amount is to reduce the units consumed per month.  Thus, taking energy efficiency measures or energy conservation measures will also reduce the electricity duty amounts on your electricity bills. While the cost of supplying electricity to all categories of consumers is same, the tariff charged from them is different. For example, if the average cost of service is Rs 3/unit, the domestic consumer may be charged at Rs 2.5/unit while an industrial consumer may be charged at Rs 3.5/unit. In this case, it is said that the domestic consumers are cross-subsidized by industrial consumers. The concept of cross subsidy has existed since very long time. However, it is now widely recognized that rational and economic pricing of electricity can be one of the major tools for energy conservation. The Government has put mechanism to remove the cross subsidy over a period.[vii]

An 18% GST cost can probably push up cell and electrical energy fees right away after GST’s rollout as these offerings are currently taxed at 15%. The economic impact of GST on the common man generally is dependent upon the ultimate GST rate. The services ubiquitously used by the usual man are more likely to prove costly below the GST regime because of escalation of GST on supply of offerings from the present effective expense of fifteen percentage to the expected 18%. The new GST regime is likely to benefit the electrical sector significantly through an overall reduction in tax rates. Under the new tax structure, the overall incidence of effective indirect taxes on the companies in the sector will be lowered to around 18 percent from the current 29-30 percent and ultimately, the benefits of this lower tax incidence will be passed on to the customers. Many economists believed that in the short term the retail inflation can increase by 0.20-0.70 percent in the year of implementation of GST. But it will only become clear when actual GST acts of both state and centre will come into existence.[viii]


Thus, Indian consumers will end up shelling out nearly Rs 30,000 crore extra every year towards payment for power consumption unless electricity is brought under the Goods and Services Tax (GST) regime. The reason? Power producers cannot claim credit for tax and cess paid on coal and coal transportation due to exclusion of electricity from the new indirect tax regime. The applicable GST rate on coal is 5%. Furthermore, the dry fuel attracts clean cess of Rs 400 per tonne. In addition, 5% GST is also payable on transportation of coal by trains. India’s power sector consumes more than 600 million tonnes of coal every year. For example, in 2016-17, Coal India (CIL) and Singareni Collieries Company Ltd (SCCL) together supplied nearly 472 million tonnes of coal to power plants while 150 million tonnes of the dry fuel was imported by the industry to meet the domestic fuel shortage. Even if we leave aside coal produced by captive mines, the total coal consumption still aggregates to 622 million tonnes. If we take 622 million tonnes of coal consumption as an indicative figure, the annual cess liability on purchase of coal for the sector alone works out to Rs 25,000 crore. And if we consider the Rs 1,100 per tonne price of CIL’s G9 coal, a grade that is commonly used by the power sector in India, as the benchmark price, the per tonne GST liability comes at Rs 55. At this rate, annual GST liability on coal purchase works out to Rs 2,596 crore. The Bharatiya Janata Party-led NDA government has promised to roll out its flagship scheme of ‘Power for All’ by 2019. It is offering free connections to poor households under the recently-launched Saubhagya scheme to increase electricity coverage which are in hope to benefit the entire nation in the long run.[ix]

iGST roll-out: Why electricity should have been brought under the new tax ragime Available at

[ii] Is electricity a good or service? Available at

[iii] Ibid

[iv] Putting Electricity in GST Available at

[v] Ibid

[vi] Impact of GST on Power sector Available at

[vii] GST on Electricity charges Availabe at–430657.asp

[viii] Ibid

[ix] Leaving Electricity Out of GST Regime Costs Indians Nearly Rs 30,000 Crore a Year Available at

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  1. Naveen Chaubey says:

    Hi, Our building is a multitenant building hence would like to know whether developer supposed to charge the GST on the electricity bill or not. Can you please provide the light on this.

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January 2021