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India is the largest generator of electricity, with a consumer base of 1.39 billion people and an industrialised economy.
Electricity is generally generated by the government / private sector and distributed through grids and authorised private distributors. In many cases, grids/ distributors provide single point supply to the Resident Welfare associations (RWA)/ Apartment Owners Associations/ Group Housing Societies (GHS)/ Developers, etc., to make electricity available to the residents/members residing in the colony and for common services/ non-domestic loads. The activity of distribution of electricity in such cases is being owned and managed by the GHS/ Developer/ RWAs.
As electricity is in nature of being intangible, the question often appears, if the same is classified as 'goods' or 'services.' Goods generally mean all moveable property. The Supreme court has answered the very question of whether electricity is goods or not,[1] where it mentioned that reference to "goods" cannot be taken in a narrow sense. Thus, merely because electric energy is not tangible or cannot be moved or touched like, for instance, a piece of wood or a book, it cannot cease to be movable property when it has all the attributes of such property. It was also stated that electricity could be transmitted, transferred, delivered, stored, possessed, etc., in the same way as any other movable property. Thus, the electricity supply was held to be classified as the sale of goods and not services.[2]
The supply of electricity was subject to separate levies by the state Government. Therefore, it was exempt from regular transaction taxes like Central excise or the Value Added Tax. Additionally, the transmission or distribution of electricity by an electricity transmission or distribution utility was also covered in the negative list under erstwhile Service Tax laws.
In line with the pre-GST regime, even under GST, "Electrical energy" has been classified as "goods" and specifically exempted from the levy of GST.[3] Further, exemption from GST has been granted to services of "Transmission or distribution of electricity by an electricity transmission or distribution utility."
A perusal of the above, prima facie, reveals that issues related to taxation of electricity, at least from a GST perspective, are sorted, and GST is not payable on any transaction related to electricity. However, when it comes to interpretation of legislature, its intent, read with relevant clarifications and judicial pronouncements, etc., our country's intellect finds question for every answer. Even this case is not any different.
The first seed of confusion sowed vide a circular[4] clarifying (confusing) that there would be GST on charges related to all incidental charges, e.g., releasing connection, rental charges, testing fees, labor charges, fees for the duplicate bill, etc.,
The second leg of confusion came from the flyer issued by CBEC (give reference). In the Flyer, It was mentioned that charges collected towards the generation and distribution of electricity using Gensets would be exigible to GST.[5] Post that, various advance rulings have been issued, with a view deviating from the basic understanding that electricity is outside the purview of GST levy:
In an interesting case, the Maharashtra Advance Ruling Authority[6] held that the monthly fixed payment of rent is for occupancy till the variable amount of electricity and water charges (at actuals) is for the effective enjoyment of the rented premises without which the licensee cannot run its business. Therefore, the charges for electricity recovered as reimbursements, even if at actuals, have the nature of incidental expenses in relation to renting of immovable property and are includible in the value of supply for levy of GST. The authority also rejected the plea that the RWA is just acting as an agent between the distributor and the consumer
In the case of Gujarat AAR[7], the applicant raised a similar question wherein the applicant makes the payment to the electric company and, in turn, collects such charges from the lessee due to the non-availability of a separate electric meter with the lessee. As per the terms of the agreement, the lessee was required to pay the charges directly to the electricity board; however, to operate practically, the lessee pays the charges based on actual readings of the sub-meter. Further, the applicant makes no profit from the collection of charges. Hence, such charges were qualified as recovered like 'Pure Agent' and not includible in the value of supply and, therefore, not subjected to GST.
In another case, the Karnataka Advance Ruling Authority[8] held that the electricity charges paid to BESCOM for power consumed towards common facilities and separately recovered from members are liable to GST as consideration was received as part of supply of maintenance services to the members.
Now the question which arises, if electrical energy is specifically exempted under GST, whether it can be taxable in any manner.
To understand this better, let us also understand the basic scheme of taxation in respect of electricity in India:
Entry 53 List -2 schedule VII of the Constitution of India authorises the States to levy tax on consumption or sale of electricity. This entry is an independent entry which means that apart from this entry, there is no other entry that authorises the levy of tax on electricity.
It is important to note that even after rearrangement by removal or the amendment of entries in the seventh schedule, the entry related to the taxation of electricity remains unchanged.
Expressio unius est exclusio alterius is a settled legal principle; therefore, electricity having specific entry towards taxation cannot be taxed under any other entry. Since the implementation of GST did not impact the said entry, it is fair to assume that GST has nothing to do with electricity. Notifications exempting electricity and its distribution from the levy of GST strongly support this view.
In line with the above views, Hon'ble Gujarat High Court[9] held the circular as ultra-virus to the suggesting levy of GST on releasing connections, rental charges, testing fees, labor charges, fees for duplicate bills, etc.,
Further, the orders of Maharashtra and Gujarat AAR are contradictory. With an almost similar set of facts, Maharashtra AAR upheld liability of GST on the Licensor collecting amount of electricity charges from the Tenants on actual basis, refusing to accept them as pure agents. At the same time, Gujarat AAR accepted the status of the landlord as a pure agent and held that no GST was payable.
Even if the finding of Maharashtra AAR is accepted that the electricity supply is an integral and essential part of the lease, it will not become a composite supply till it is charged separately. In that case, electricity being "goods" and outside the purview of GST, the question of levy GST shouldn't arise in a similar manner in which GST is not liable on the alcohol supplied along with the food.
The above logic that electricity is outside the purview of GST would also counter Karnataka AAR, where electricity charges towards the common area have been held to be taxable, and the flyer issued by the CBEC holding that electricity generated and supplied by the GHS/ Developer/ RWAs would be liable to GST.
From the above discussions, it is almost clear that even though contradictory advance rulings and circulars have resulted in only creating unnecessary confusion, the legislature is abundantly clear that the supply of electricity, in any manner, is the outside purview of GST. In such a case, it is high time that the Government clarifies this once and for all to avoid any further litigation on this issue. Such clarification is also essential in the wake of discussions related to the inclusion of electricity under GST
[1]Commissioner Of Sales Tax Madhya vs Madhya Pradesh Electricity
[2] State of A.P. etc., Vs. NTPCL & Ors etc., (2002-TIOL-107-SC-CT)
[3] Notification 2/2017- Central Tax (rate) dated 28 June 2017
[4] Circular No. 34/8/2018-GST dated 1 March 2018
[5] 332/04/207- TRU Flyer No. 42
[6] Indian Engineering Works (Bombay) pvt. Ltd. [2021 (2) 773]
[7] M/s. Gujarat Narmada Valley Fertilisers & Chemicals Ltd., dated 17 September 2020
[8] M/s Prestige South Ridge Apartment Owners Association [2019(11) 224]