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The recent breakthrough in the deadlock between the Centre and the States on GST implementation is significant for this long-pending reform. Indications are that the States have agreed to include the petroleum sector within the ambit of the GST, which would pave the way for substantial rationalisation of tax on this sector.
If they can be persuaded to accord the same treatment to electricity, another important constituent of the power sector, then the GST could indeed justify the label of the ‘game changer’ that could provide substantial boost to investment and economic growth.
The treatment of the power sector, including petroleum products and electricity, is a crucial aspect of the GST design. Power sector is critical for Indian economic growth and it is important that its taxation be as efficient as possible. For tax efficiency, the sector should be included in the GST ambit so that it can claim credit for the GST applicable on capital goods, raw materials, feed stock, and other inputs acquired for production and distribution of its outputs. Input credits are denied if the outputs of a sector are not subject to GST.
Positive move on petro products
Under the current version of the Constitution (Amendment) Bill on GST, petroleum products are excluded from the GST purview. Also, electricity would continue to be subject to the electricity duty levied by the States. The industry has been demanding the inclusion of both petroleum and electricity duty in the GST base, a view supported by the Centre and the Thirteenth Finance Commission. So, the States’ acquiescence to the inclusion of the petroleum sector in GST under the Constitution is indeed a positive move. Given the size and importance of the sector, its exclusion from GST would have had a serious impact on the industry and the economy.
Exclusion of petroleum from GST would have denied it the right to claim credit for the GST incurred on the inputs acquired at all stages, including exploration and production, refining, transportation and pipelines, and distribution and marketing. The quantum of non-recoverable input credit for the tax paid on inputs could be as high as Rs 30,000 crore. Such huge costs would severely impact investments in the sector.
Petroleum products are a significant contributor to government revenues. Not surprisingly, the States had strong reservations about their inclusion in the GST purview, for fear of loss in their revenues. This fear was based on a false apprehension that the tax on petroleum products would be limited to the GST rate applicable to other goods and services. In most international jurisdictions, petroleum products, like other demerit goods, attract the GST as well as a supplementary excise over and above the GST. This is indeed the system that is now being considered by the States.
Positive charge for electricity sector
Under the Constitution, Entry 53 in the State List of the Seventh Schedule empowers the States to impose tax on sale and consumption of electricity, except when consumed by the Government of India or the Railways. The industry would like to see the inclusion of electricity duty in the GST ambit.
Electricity has been held to be a ‘good’, but it is presently exempt from CENVAT, and VAT. Only electricity duty is levied on its consumption by the States. Exemption of electricity from the main indirect taxes results in a situation where generation and distribution of electricity are not allowed any credit for the taxes applied to inputs used in these processes. Thus, the excise duty or the state VAT paid on equipment and stores get embedded in the cost of the end product. This, together with the non-creditable electricity duty, results in substantial tax cascading when electricity is used as an intermediate input by the industrial and commercial users.
If electricity is taxable under the GST, full credit would be available for the taxes paid on inputs. It would significantly reduce the cost of power projects and consequently the cost of generation and distribution of electricity. The lower costs will also benefit the downstream industries.
(The author is Advisor – Tax & Regulatory services, Ernst & Young. Views are personal)
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