Electricity is an important source of commercial energy. In recent years increased price of electricity has raised many socioeconomic and political issues. Although, there are any reasons for rise in the price of electricity but this article high lights the cascading effects of taxes in power sector.
The power sector should be included in the GST scheme. Set-off for the taxes paid across all the processes / activities in the power sector should be confirmed. It will reduce the cost of power projects. Consequently, cost of generation and distribution of electricity will also come down. It will stimulate the Indian industries since power is a significant input in the process of production of goods and services. Reduced cost of generation and distribution of electricity will improve the profitability of power projects. Profitability in this sector will generate the scope of new investment into this sector.
Government through 122th amendment to the Constitution of India on 19.12.2014 introduced, The Constitution (One Hundred & Twenty Second Amendment) Bill, 2014 in Parliament with a focus on setting up GST council for smoother, faster and hassle free implementation of Goods & Service Tax (GST). As per the clause No. 12 of these proposed bill a new article shall be inserted vide Article No. 279A in the Constitution by the order of President within 60 days of commencement of The Constitution (One Hundred & Twenty Second Amendment) Bill, 2014.
In the proposed bill various entries in Union and State lists of Schedule VII have been deleted. But no change or amendment is proposed for entry no. 53 of State List which deals with Taxes on the consumption or sale of electricity which has major impact on Sales and Purchase of Electricity in the country. Power sector plays a vital role in economy and keeping it out of GST scope will affect economy adversely as it has cascading effects of taxes.
Cascading effects of taxes in power sector is one of the factors for costly power in our country. Setoff of taxes in Power generation, Transmission and Distribution has not yet been rationalized in spite of the fact that power is one of the major inputs for manufacturing sector. For the seamless flow of input taxes across all the processes / activities in the power sector, it is necessary to rationalize the tax treatment of this sector.
Present condition of power sector is not favorable and is subject to multiple taxes on Capital Goods and Inputs. Taxes applicable on Capital Goods and Inputs are:
– Basic Excise Duty
– Custom Duty
– Countervailing Duty
– Special Additional Duty
– Service Tax on input services
– Education Cess
– Water Cess
– Royalty on Coal
– VAT on consumables/fuels
– Local Area Development/Rural area development tax
– Entry Tax
– Stamp duty
– State Electricity Duty (SED)
– Income taxes,
These taxes have cascading effects on Electricity Generation, Transmission and Distribution.
Power equipments i.e Turbines, DG Sets, Boilers all are subject to Excise Duty @ 12%. Custom duty, CVD are also applicable on Imported equipments. The effective rate is around 21% (5% Basic Duty+12% CVD+4SAD+ cess). So taxes on power generation equipments remain embedded in the cost of power equipments.
In case of other Inputs/Fuels i.e Coal, Gas, Naphtha, Diesel and other consumables & spares are subject to various govt. levies which further enhance the cost of power. Taxes on Diesel and Petrol also increase the cost of freight which also hit hard and increases the cost of Coal and consumables.
Like Excise duty, Service tax @12.36% is also levied on input services.
Though generation of power is exempted from Excise Duty (Excise Tariff 2716 00 00) it makes situation more difficult as Input taxes cannot be set-off which has cascading effect on cost of power.
Similarly, in state VAT, Electricity is exempted from VAT and set off of input taxes is not available in the process.
In addition to VAT, states also levy royalty on the coal mines. The rates vary from state to state as per coal grade. Also royalty is charged for Natural Gas supplied to power plants. On coal, rates for royalty are 14% on ad-valorem basis on price of coal (Notification No. 342 dt. 10.05.2012 of Ministry of Coal). On gas the royalty is Rs. 250/1000 SCM.
Water Cess: There are different rates of water cess in different states. We have noted an increasing tendency of the state governments for water cess.
In net shell, Input taxes become major share in total cost of power and it affects the economy adversely. Power is used as an intermediate input. The overall impact of present taxation regime at both central and state level is compounding cascading effect. This effect hikes the price of power generation and distribution. Industries in India got badly affected by this expensive power consumption. As a result, the international competitiveness of Indian industry is significantly undermined.
State Electricity Duty (SED), is another component affecting the cost of power to the consumer. There is no uniformity in SED levied by the State Govts. At the time of selling of Power to industry and end consumers, states charge Electricity Duty (ED) on consumption of power, which is around 10% of electricity bill. Some of the states charge per unit basis. Electricity Duty is outside the preview of state VAT, hence Input taxes cannot be set-off. It further increases the cost of power for end user.
Transmission, Distribution and pilferage losses are equally responsible for high cost of Power in India. Around 21% of total power generated in India get lost during Transmission and Distribution which amounts to Rs. 21,08,520 lakh. Percentage Losses of some of the other developed and developing countries are as under:
So, considering the amount involved there is a need to take remedial actions to reduce this national wastage and govt. should invest in the mechanism to get out of it.
The introduction of Goods and Service Tax (GST) regime could have resolved the aforesaid issues in the power sector so that the target of the seamless flow of input tax credit can be achieved. The thirteenth finance commission has given some valuable suggestion in this area, which are as under:
i) The electricity duty levied by the states should be subsumed in the GST.
ii) The power sector must form an integral comprehensive GST base over which both the central and state governments would have concurrent jurisdiction.
iii) The tax regime for the power sector should be same as in the case of any other normal goods.
iv) Article 278 and article 288 of the constitution should be amended to enable levy of GST on supply of electricity to Government at all levels like any other normal goods.
But now in proposed amendment bill no such provisions have been exercised by the government and Power sector has been kept out of GST preview. This will affect Indian Economy adversely and Industry has to suffer a lot and inflation will go up further. Due to political and economical reasons states are not in favor of keeping Power sector under GST and common man has to feel the heat of cascading effects of taxes.
The power sector should have been covered under GST regime. Set-off for the taxes paid across all the processes / activities in the power sector should be confirmed. It will reduce the cost of power projects. Consequently, cost of generation and distribution of electricity will also come down. It will stimulate the Indian industries since power is a significant input in the process of production of goods and services. Indian industries may compete in the international market more efficiently. Reduced cost of generation and distribution of electricity will improve the profitability of power projects. Profitability in this sector will generate the scope of new investment into this sector.
B.com (Hon.), M.Com., FCMA