In the quagmire of heated arguments and political parleys pertaining to the upcoming goods and services tax (GST), there is a deafening silence pertaining to the absence of electricity, natural gas and coal from the ambit of GST. All the above being key inputs to the growth of the country and the government’s Make-in-India initiative, it is important that their tax treatment is accurately planned to deliver overall benefit to the Indian economy.
It would appear intuitive that by leaving a sector out of the purview of a new tax to be imposed, the sector and the country should greatly benefit. Perhaps it is under this mistaken assumption that the mandarins of the North Block have left out the power sector from the proposed GST Bill. It is important to clarify and elaborate the following counter-intuitive observation—leaving coal, power and natural gas out of the GST Bill actually increases the cost of power and burdens the economy as a whole.
The power sector is inherently capital-intensive in nature. Typically, a power plant of about 1,000 MW that costs about R5,000 crore to set up generates only about 700 crore kWh a year, and has a revenue of about R2,500-3,000 crore each year. It is up to the developer to recover the costs of setting up the plant over the next 25 years, making this a long-term annuity business. Therefore, the capital-intensive nature of the business means that tax on input costs (equipment and services) can amount to a substantial amount, almost to the tune of about 15% of the project cost. This excise and service tax paid for the equipment and services incurred during the construction of the plant, unfortunately, and uniquely to the power sector, cannot be set off against the end-produce since power is exempt from excise duties or service tax.
This problem was not acute in the past since power equipment was exempt of customs and excise duties under the Mega Power Policy introduced in 2005. However, since this policy has been phased out, the developer pays substantial duties during project development, but these duties, for want of set-off with the end-product, stay accumulated in the project company, burdening the developer. These costs eventually get loaded onto the power tariff and get transferred to the consumer of power after loading for transmission and distribution losses, subsidies and thefts, thereby burdening him by over 40 to 50 paise per unit of power. For this to change, power needs to be included in the GST regime, the benefit of set-offs can be availed and power can be cheaper.
Further, the power sector is naturally affected by the exclusion of its fuels from the GST regime. In this case, the power sector is greatly affected since coal and natural gas are also being left out of GST. Currently, coal attracts royalty of 14%, excise duties of 6.2% entry taxes, clean energy cess and VAT across various states. Most of these taxes compound, resulting in an all-in cost of about 27-28% to the power sector. Taxes on diesel also increase the cost of freight that hit the cost of coal in power plants. Similarly, natural gas involves taxes of over 19% (including VAT, entry tax, CST and service tax on transportation of natural gas) that is eventually loaded onto the cost of power. In both these cases, a set-off is unavailable since the production and sale of electricity is not taxed. This increases the cost of power needlessly, while the power project company faces an indefinite pile-up of tax credit that cannot be used to be set-off against its end-product.
This unfortunate dispensation for the power sector is rather unique and is not similar to any of its other counterpart industrial sectors such as fertiliser or petroleum refineries. All the other sectors pay input taxes, but have the benefit of availing credit on their end-product as they are taxed under various regimes, thereby reducing the end-cost of their commodity. Ironically, perhaps the common man of India should be more grateful to the government for inclusion of electricity in the ambit of GST, than for its exclusion.
The author is CEO, Oakridge Energy, a specialist infrastructure development and asset turnaround company in the power sector