India is the third largest electricity producer in the world. The top two positions are held by U.S and China respectively. But the per capita consumption of our country is amongst the lowest in the world. The Power Industry currently enjoys many tax concessions and tax exemptions and thus everyone is eagerly awaiting more GST news to understand the new tax scenario. Legal news suggests that the power industry was able to keep the cost of electricity since it has been kept out of the ambit of taxes as per constitution Amendment Act. The constitution treats electricity and taxes separate from each other. The electricity was not included in the scope of taxes because the electricity producer would not be able to claim input tax credit for the production of electricity against the output tax.

The tax treatment for power sector is the matter of prime importance because power is one of the most important inputs for the production of goods and services. Hence the tax treatment of power sector must be rational. Latest GST news points to many new developments for the power sector.

As per the latest GST news, under the new tax regime, the power generation companies may experience a rise in costs as all inputs are in GST ambit other than the electricity. Also, under current tax structure transmission and distribution is not levied a service tax but after GST whether this exemption will be retained or not is not clear.

After GST, since the VAT and Excise are subsumed, the tax rates may be reasonable. Power companies have mixed feelings based on latest GST news.  The cost of inputs or procurement may reduce in the thermal power category since the tax rate for coal is now kept at 5% while imported coal will get levied with the basic customs duty or BCD as per GST news. This coal tax was previously kept at 12%. However, at the same time the cost of capital goods and services cost in all segment of power may increase to 18% from current 15%.

According to ICRA, the reduction in coal tax will generate a positive impact on the domestic coal users but a negative impact for the imported coal users. Looking at the other side, the impact of GST on the wind energy sector will be slightly negative due to rise in capital cost which will end up causing a higher tax rate of wind turbine generator. The wind energy sector had been availing many concessions and tax exemptions previously. ICRA also points out that there will be a negative impact on Boiler, turbine and generator equipment for thermal power projects as the GST rate will be 18% for them.

The power companies were striving to have an exemption of input costs from GST which did not happen as per GST news. With 18%, the cost of their equipment will rise which they cannot even pass to consumer since the power that they produce is not a part of GST. Also, because service cost has gone up from 15% to 18% it will be an incremental cost for the company and hence their operating expenses may increase. While some power distribution company appears to be in losses as per latest GST news, but some are quite hopeful and positive about the implementation of GST.

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