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GST on the supply of electricity is one of the prominent issues. Taxpayers are under a dilemma of whether the electricity supply is the sale of goods or services or whether it is taxable or exempt under GST.
The implications under GST will be if electricity is supplied in conjunction with other goods and services. These issues will be explained in this article.
Let’s discuss the definition of goods and services under GST before selecting the right fit for electricity.
Goods include moveable properties, actionable claims, crops and anything attached to the land which needs to be severed before its sale but excludes money and securities.
Services are anything other than goods, money and securities. Still, they include the use of money or conversion from one currency to another currency for which a separate consideration is charged (for example, commission or interest).
Electricity is a form of moveable property, and hence the supply of electricity will be considered a supply of goods under GST.
Supply of electricity is exempted under GST as per the Notification 02/2017 (Central Tax) dated 28 June 2017 under the heading “Electrical Energy” (HSN Code: 27160000).
Further, services provided by an electricity transmission or distribution utility (e.g. state electricity board) by way of transmission or distribution of electricity is exempted under GST as per the Notification 12/2017 under heading 9969.
Accordingly, if any person other than electricity transmission or distribution utility supplies electricity, it will attract GST at the rate of 18%.
Before GST, electricity supply was exempted under the respective state’s VAT acts. Also, services provided by an electricity transmission or distribution utility by transmission or distribution of electricity were exempted under the service tax act.
Charging GST on the supply of electricity will bring many benefits for businesses. GST levied will serve as an input tax credit for businesses, reducing their cost of production. Businesses, especially manufacturing companies, can improve price competitiveness in domestic and foreign markets.
While the view may not be the same if electricity is used for personal purposes where input tax credit cannot be availed, this will increase the cost of living.
GST collected on electricity supply will be shared between state and central government. At the same time, previously state-specific charges were levied and collected by respective state governments, which may be abolished after the electricity supply is covered under GST.
Certain situation-specific issues are covered as follows:
(A). Will the owner have to charge GST on electricity if the tenant recovered these charges?
In a rental agreement, the tenant receives many other services besides renting of property (for example, access to common areas, maintenance services, electricity supply etc.), for which the owner can charge it separately or include these costs in rental charges. Hence, this is a case of composite supply.
Composite supply refers to the supply of two or more goods or services that are bundled and supplied with each other in the normal course of business, where one of the goods or services is a principal supply.
GST is levied at the rate of principal supply irrespective of other goods or services have different rates.
In our case, renting property is the principal supply, and other services are a part of the principal supply. Accordingly, GST will be applicable on all ancillary services (including electricity charges) provided by the owner.
But, if the owner collects charges for ancillary services (including electricity charges) on a pure agent basis (i.e. the amount of charges on the electricity bill is collected by the owner and no profit motive is involved), then GST would not be applicable on any ancillary services (including electricity charges).
(B). Will GST be applicable if other ancillary services are provided by an electricity transmission or distribution utility?
CBIC in its circular no. 34/8/2018-GST has stated any ancillary service provided by the above utility will be taxable under GST. These services include:
But if we look at this issue from another angle, the ancillary services provided by the utility are related to the supply of electricity. Without these ancillary services, utilities won’t be able to supply electricity. Hence, this is a composite supply where the principal supply is electricity, and therefore GST will be exempted.