Why should electricity be brought in GST
1. Multiplicity of rates
- Currently, there is a confusing number of electricity taxes that vary by states and across user categories (lower tax rates for consumers and high for industrial users).
- Taxes levied by the states thus vary from 0% to 25%.
- The current situation imposes large costs that seriously undermine the government’s Make in India initiative.
2. Higher cost of electricity making manufacturing costlier:
- The most serious problem is that costs to industrial users of electricity are higher because they include the taxes on inputs that have gone into the supply of electricity.
- These include taxes on raw materials (coal, renewables) and other equipment (solar panels and batteries).
- Not being part of the GST means that input-tax credit can not be claimed.
- This results in input taxes getting embedded in the final price.
- This, along with the cross-subsidisation of domestic and agricultural users, total up to increased costs and lower margins of between 1-3% for several industries.
Hurts domestic manufacturers:
- This embedding of taxes hurts manufacturers selling to the domestic market.
- For the textile industry, for example, these embedded taxes amount to about 2% of the price.
Hurts exporters even more:
- In particular, they hurt exporters of electricity-intensive products because they are not liable to any duty drawback—relief for taxes embedded in exports.
- 1-3% increased costs for manufacturers are significant especially for exporters who face ferocious international competition and where a 1% extra cost could be fatal.
3. Will remove current bias in GST towards renewables:
- Currently, there is a large bias in favour of renewables in GST policy.
- Inputs to renewables generation attract a GST rate of 5% while inputs to thermal generation attract higher rates of 18%.
GST in not the tool to support renewables:
- Support for renewables should be direct, conscious, and transparent.
- GST should not become the instrument for adding (non-transparently) to that support.
- Supporting renewables might be conscious policy (and also good policy), but currently subsidisation is proliferating across many policies, making it difficult to quantify the overall support.
Electricity in GST will level the field:
- If electricity were to be included in GST, then there would be no discrimination between renewables and thermal energy. This is because all inputs going into both forms of electricity generation would receive tax credits.
- GST would then become neutral between different forms of electricity generation as good tax policy should be.
- Thus, the case for including electricity in the GST is compelling.
Won’t be easy to get electricity in GST
It would lead to losses for both Centre and especially States:
- As explained above, including electricity in the GST would reduce or eliminate embedded taxes in electricity-using products.
- That means that both the central and state governments would lose revenues from these products.
- In addition, state governments would lose taxes from electricity use itself.
States would be reluctant to lose taxes on electricity:
- Taxes on electricity is an important source of revenue for the states, amounting to about Rs. 31,000 crore for all the states combined.
- On average, electricity taxes account for about 3% of own tax revenues of the states, going up to close to 9% in other states.
- States are therefore reluctant to give up the right to levy these taxes.
What can be done to make it possible to include electricity in GST
1. Centre and States share the burden in light of benefits:
The Centre and the states can bear the losses of the embedded taxes since the benefits would also be shared.
The Centre would then compensate the states only for the direct loss of revenues.
2. Allow state governments to impose a small non-GST able cess:
Tax (about 5%) could be imposed on electricity in the GST—allowing inputs tax credits to flow through the GST pipeline.
To compensate for loss of revenue, the state governments may be allowed to impose a small non-GST able cess on top of the GST rate.
In this case, however, the greater the cess, the more it would resemble situation as is now, with all its problems. So, this half-way solution must come with some limits on state governments’ freedom to levy further taxes on electricity.
Summary of benefits of electricity in GST:
In sum, there are four clear benefits from bringing electricity into the GST:
- Reducing the costs for manufacturing
- Improving the competitiveness of exporters
- Reducing the cross-subsidisation of electricity tariffs that further undermines the competitiveness of manufacturers and exporters
- Eliminating the large biases—and hence restoring neutrality of incentives—in electricity generation
There would be costs in terms of foregone revenues but the benefits would be large and states could be partially or fully compensated. Indian manufacturing is saddled with costs. Efficient GST policy should aim to reduce them.