Excluding power out of GST to increase the cost of power

As the time to roll out GST draws closer, the soup of controversies around it thickens. This time the focus is on the power sector. The government’s recent decision to keep electricity out of the scope of GST bill has raised many eyebrows.

 

The exclusion of electricity from the proposed bill is likely to increase the cost of power by around 6-18% for the consumers.

Currently power is subject to duties levied by different state governments and these duties are paid by the consumer. However, captive power generation is exempted in some cases. Currently, the inputs required by industries generating power are taxed but the companies are able to offset these input taxes against liabilities on outputs other than power.

There are issues with output tax credit in the current regime also but the condition may get aggravated under GST. Under the proposed GST regime, the companies will continue to pay tax on their inputs of fuel and machinery but will not be able to claim credit on the output, electricity being exempted from GST.

Therefore, consensus is on either including power under the ambit of GST or in bringing about a provision to refund the taxes levied on inputs along with zero-rated output.

The worst to be hit would be the renewable energy sector as the inputs of machinery and equipment would be taxed at around 18% under GST and since tax credit on output will not be available, it will mean a direct increase in the cost of power to consumers by 18%. The power companies will also be at a disadvantage due to high input costs. Further, this can lead to inflation in the entire economy because power is used for the generation and supply of goods and services.

The solution to the entire problem could be inclusion of electricity under the proposed GST regime and make it zero-rated. The companies and firms engaged in power production would then be able to claim credit on tax inputs.