5% GST on electricity may cause Rs 5,700-crore loss to states, Centre

Power cost may fall for industrial consumers, says NTPC-commissioned report

A proposal to bring electricity under the goods and services tax (GST) regime may cause a fiscal hole of Rs 5,780 crore for both states and the Centre. In a report commissioned by state-owned NTPC, a 5 per cent GST rate has been suggested for electricity.

In a scenario when all existing electricity duties are also subsumed under the GST, the losses balloon to Rs 59,000 crore with the lion's share to be borne by states, that is, Rs 57,000 crore. 

The report, however, is based on 5 per cent GST and partial electricity duties.

The ministry of power and ministry of finance have been deliberating on imposing GST on electricity. NTPC and the Central Electricity Authority (CEA) were mandated to study the impact of this. The report, prepared by EY and commissioned by NTPC, analysed the impact of 5 per cent GST on consumers and the government treasury.

While coal, which fuels 70 per cent of India’s electricity supply, is taxed under the GST regime, electricity generation, transmission and distribution are exempted from GST. There is a 5 per cent GST and Rs 400 per tonne GST compensation cess levied on coal along with 14 per cent royalty on basic price. Similarly, several components involved in the electricity supply chain come under various GST tax slabs.

“Due to GST exemption on outward supply, power companies (generation, transmission and distribution firms) cannot avail the ‘input tax credit’ on GST paid on goods/services procured by them. This results in an increase in power cost for industrial and commercial consumers,” said the report.

In August 2021, NITI Ayog along with RMI International, in a report on the power distribution sector, said, under GST, per unit cost of power can reduce by “17 paisa across the power value chain on account of availability of input tax credit.”

The EY report has supported the claim, saying GST imposition on electricity would lead to reduction in cost for consumers, especially industrial and commercial consumers. EY has estimated a cost reduction of 9 to 12 paisa for different fuel sources of electricity and 0.05 to 11 paisa (average 16 paisa) across the generation, transmission and distribution chain of electricity.

While electricity is exempted under GST, almost all states impose an electricity duty on consumers. This duty is higher for high consumption slabs, which include industrial and commercial consumers. Non-availability of input tax credit in electricity leads to higher costs for industries.

“Allowing input tax credit by covering electricity under GST will reduce the power tariff cost for industrial and commercial consumers, resulting in low cost of production of goods and services. Accordingly, Indian products would be a competitive market,” said the EY report.

However, for the domestic segment, EY’s report said chargeability of GST will lead to a per unit increase in tariff, which the state governments should absorb through a subsidy. It said this would need to be done for agricultural consumers as well. The report also added the amount of subsidy levied would get set-off by the revenue earned by a state government on account of charging GST.

Last year, India Inc, in its Budget representation to finance minister Nirmala Sitharaman, had suggested either bringing electricity under GST or keeping it exempt from refund of input tax credit.