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NEW DELHI : The power ministry has told the finance ministry it favours bringing electricity under the goods and services tax, two government officials aware of the development said, outlining a proposal that could help reduce electricity tariff for consumers.

Electricity costs are a substantial component of manufacturing expenses, and any reduction will help the government’s Make in India push, being rolled out through the production-linked incentive scheme.

Apart from electricity, currently, petrol, diesel, jet fuel, tobacco and land do not fall in the ambit of the indirect tax that came into effect in 2017. 

Any such decision will have to be taken by the GST Council. Under the present dispensation for electricity, cross-utilization of tax credits is not possible, which means its inclusion will make the sector tax-efficient and reduce the tax burden. “For GST matters, the GST Council takes the decision, not the finance ministry," said one of the government officials cited above seeking anonymity.

GST-related legislative proposals are first examined by a law committee of central and state officials before the Council considers them.

Experts said the proposal would relieve manufacturers, large service providers, housing project developers, and consumers. At present, tax on electricity varies from state to state and for classes of consumers, such as domestic and commercial. Besides, some states also have a surcharge beyond a certain consumption threshold. 

“Since revenue from electricity duty to states is not as high as that in respect of petroleum products, bringing it under GST may also set the tone for eventually subsuming crude oil and select petroleum products into GST," said M.S. Mani, partner at Deloitte India. 

For instance, in the case of a housing project, the developer getting the benefit of input tax credit for tax on electricity will make his operations more tax efficient. “It will reduce the cascading of taxes and reduce the compliance burden not only for utilities but also for developers and contractors. It will improve margins which may be available for passing on to consumers," said Rajat Mohan, senior partner with AMRG & Associates, an accounting firm. 

India’s electricity demand has picked up after a dip during the second covid wave, touching a record 200.57 gigawatts on 7 July. Average electricity availability is up to 22 hours in rural areas and 23.5 hours in urban areas, power and new and renewable energy minister Raj Kumar Singh earlier said. As part of its energy transition efforts, India is also working towards electrification of the economy by developing action plans for renewable power. 

India’s electricity demand is expected to grow by 8-8.5% in FY22, according to ICRA. According to the Central Electricity Authority, by 2030, the country’s power requirement would be 817GW.

Queries emailed to spokespeople for the ministries of power and finance on Tuesday night remained unanswered.

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