GST payable on Collection of Electricity

Power, or electrical energy, is an important source of revenue for state governments because it is under the state list of the Constitution, and they collect electricity costs from users. This is one of the most disputed problems, whether it is considered a good or a service, and if GST applies to it. Furthermore, whether or not tax would be charged on a combined provision of power and other service aspects to clients. In this article, we will go through the about the GST on Supply of Electricity.

Key Abstract

One of the most important difficulties is the imposition of a GST on the provision of power. Taxpayers must decide if energy supply constitutes a sale of goods or services, and whether it is taxable or exempt from GST.

If power is delivered in combination with other products and services, the ramifications under GST would be significant.

Electricity under Goods and Services Tax 

Goods include transportable items, actionable claims, crops, and anything tied to land that must be separated before it may be sold, but do not include money or securities. Anything other than products, money, and securities is considered a service. They do, however, include the usage of money or the conversion of one currency to another for which an additional compensation is charged (for example, commission or interest).

Because electricity is a type of transportable property, its supply will be regarded a supply of commodities under GST.

Are you finding any issue regarding GST? Let your issues resolve through us. Connect to Legal Window for filing up of GST Return, GST Registration, GST Annual Return.

Taxation of Electricity Generation and Supply

Electricity supply is excluded from GST per Notification 02/2017 (Central Tax) issued 28 June 2017 under the category “Electrical Energy” (HSN Code: 27160000). Furthermore, according to Notification 12/2017, services supplied by an electrical transmission or distribution utility (e.g., state electricity board) in the transmission or distribution of electricity are exempt from GST under category 9969.

As a result, if anybody other than an electrical transmission or distribution utility delivers power, it will be subject to 18% GST. Previously, energy delivery was free from VAT under the various states’ VAT legislation. Furthermore, under the service tax statute, services supplied by an electrical transmission or distribution utility through transmission or distribution of power were exempted.

The Benefits of Including Electricity in GST

The imposition of GST on the provision of energy would provide several benefits to companies. The GST imposed will function as an input tax credit for enterprises, lowering their production costs. Businesses, particularly manufacturing firms, may increase their pricing competitiveness in both home and international markets. While the viewpoint may differ if power is utilised for personal reasons and no input tax credit is available, the cost of living would rise.

The GST collected on electricity will be split between the state and federal governments. At the same time, previously levied and collected state-specific tariffs by separate state governments may be phased out once energy delivery is covered by GST.

GST treatment on Electricity Supply

The following situation-specific difficulties are addressed:

Case (A) 

Is the owner required to levy GST on electricity recovered by the tenant?

Aside from renting property, the tenant obtains numerous other services in a rental agreement (for example, access to common spaces, maintenance services, energy supply, and so on), for which the owner might charge individually or include in rental payments. As a result, this is an example of composite supply.

The provision of two or more products or services that are packaged and supplied with each other in the usual course of business, when one of the commodities or services is a major supplier, is referred to as composite supply.

GST is taxed at the rate of the primary supply, regardless of whether secondary commodities or services have different rates.

Renting property is the primary supply in our situation, while other services are a component of the primary supply. As a result, GST will be levied on any auxiliary services offered by the owner (including power expenses).

However, if the owner collects ancillary service costs (including energy prices) as a pure agent (i.e. the amount of charges on the power bill is collected by the owner and no profit motivation is involved), then GST is not imposed on any ancillary services (including electricity charges).

Case (B)

Will GST be levied if an electrical transmission or distribution utility provides other auxiliary services?

CBIC has indicated in its circular no. 34/8/2018-GST that any ancillary service offered by the aforementioned utility shall be chargeable under GST. Among these services are:

• Application cost for releasing electrical connection
• Metering equipment rental charges
• Fee for testing meters/transformers/capacitors, etc.
• Customers are charged labour fees for moving metres or utility lines.
• Duplicate bill charges

However, when viewed from another perspective, the utility’s auxiliary services are tied to the delivery of power. Utilities will be unable to deliver energy without these supplementary services. As a result, because this is a composite supply with electricity as the primary supply, GST will be waived.

GST payable on Collection of electricity & other expenses forming part of consideration for Renting/Leasing of Immovable Property

This can easily understood this concept by taking cognizance of Judicial Interpretation in Case of Harish Chand Modi (2022) 37 J.K.Jain’s GST & VR 171,

• Background of Case: The appellant had entered into a lease arrangement with its tenant (Lessee) and had leased the 6th and 7th floors of its building at premises “Shanti One,” Jodhpur-342003. Appellant is a provider of Immovable Property Rental and Leasing (SAC codes-997212). Because the appellant did not supply a separate electric metre to the lessee in this case, the lessee cannot pay electric costs directly to the electric provider. In such cases, the appellant pays the power company and collects the charges from the lessee. To make the system operate, the appellant placed sub-meters, which collect charges for the electric power consumed by the lessee based on the utilisation of electricity as determined by such sub-metre.According to the lease, the applicant charged the tenant Rent, Maintenance Charges, Interest, Security Deposit, JVVNL Electricity Charges, and DG Electricity Charges (Lessee). The appellant obtained an advance in this respect from the lessee and adjusted it in subsequent months/periods. The main question in this appeal is whether the appellant’s act of collecting power expenditures falls under the category of pure agent or not.

• Findings by ARA: The following is the findings of the ARA:
  The provisions of Rule 33 of the CGST Rules, 2017, relating to pure agents, are copied below. “33.Value of service supply in the situation of a pure agent.” Regardless of everything else in this Chapter, the expenditure or costs incurred by a supplier as a pure agent of the recipient of supply will be excluded from the value of supply if all of the following requirements are met, namely,
  • When the supplier makes the payment to the third party on the recipient’s authorisation, he acts only as the recipient’s agent.
  • The payment made on behalf of the recipient of supply by the pure agent has been separately specified in the invoice provided by the pure agent to the recipient of service; and
  • The supplies purchased by the pure agent from a third party as the recipient’s pure agent are in addition to the services he provides on his own behalf.

Explanation.-For the purposes of this regulation, a “pure agent” is defined as a person who-

• Enters into a contractual arrangement with the recipient of supply to serve as his exclusive agent in incurring expenditure or costs in the process of providing products, services, or both;
• Neither seeks to hold nor holds any claim to the goods or services acquired or delivered as the recipient’s sole agent;
• Does not utilise the products or services obtained for his personal benefit; and
• Gets only the real cost of procuring such products or services, in addition to the amount paid for supplies provided on his own account.”

AAR has noted that there is no unambiguous authorisation granted by the lessee in the current case, on which the supplier (lessor) acts as a pure agent of the recipient of the supply when he makes the payment to the third party (2021) 36 J.K. Jain’s GST & VR 500. The rent agreement does not become an authorization since the phrase “reimbursement” is not stated anywhere in the agreement. Furthermore, the applicant (lessor) does not enter into a contractual arrangement with the recipient (lessee) of the supply to serve just as an agent to incur expenditure or costs in the course of providing services. As a result, the act of acting as a “pure agent” has not been defined.

• ARA’s Analysis: Thus, reimbursement of electrical expenditures had not been paid on an actual basis, as it had been collected in advance with rent and further modified by the lessor by raising the invoice/bill/memo/document. As a result, in this scenario, the so-called reimbursement of power expenditures would be taxed under clause (c) Section 15(2) of the CGST Act, 2017.After reviewing the agreement provided with the appeal memo, AAAR discovered that Clauses 8(g) and (h) are linked to electricity expenditures. According to these terms, only lessee is obligated to pay appellant’s electric expenses. Because there is no authorisation from the lessee to which third party electric expenditures shall be payable, condition No. I of the CGST Rules, 2017 is not met.Furthermore, based on the facts of the case, AAAR agreed with the AAR, Rajasthan’s observation that reimbursement of electricity expenses had not been made on an actual basis by the lessee to the lessor because it had been collected in advance with rent and further adjusted by the lessor by raising the invoice/bill/memo/document. Furthermore, the appellant has failed to demonstrate that they are a pure agent. As a result, in this scenario, the so-called reimbursement of power expenditures would be taxable under Section 15(2) (c) of the CGST Act, 2017.

• ARA’s Conclusion and Decision: As a result, AAAR determined that appellant is not acting as a pure agent. The appellant has emphasised the ruling issued by the Gujarat Authority for Advance Ruling in the case of Gujarat Narmada Valley Fertilizers & Chemicals Ltd. In this regard, we believe that these orders were not issued by a higher court than the current one, and so they are not being regarded.

• Held: “The repayment of electrical expenditures by the lessee to the lessor had not been paid on an actual basis, as it had been collected in advance with rent and further modified by the lessor by raising the invoice/bill/memo document.” As a result, the appellant is not acting as a pure agent, and the criteria of Rule 33(i) of the GST Rules is not met. The applicant’s (Lessor’s) primary supply of services is “renting/leasing of immovable property,” which attracts GST at 18% under SAC code 997212. The Lessor’s collection of energy and other expenditures for consideration is in regard to the composite delivery of the primary service of’renting of immovable property,’ and would form part of the taxable value under Section 15(2) (c), CGST Act, 2017.”

Endnote

Electricity, being a state subject under Article VII of the Indian Constitution, falls beyond the purview of GST taxability. As a result, we realise that, while electricity is a good, its taxability is not covered by the CGST Act, 2017 since it is particularly covered within the State subject in the Indian Constitution.