Energy sector: Bring parity in taxation between govt and private power producers

Energy and infrastructure typically go hand in hand in being key drivers of any economy, and the Indian economy is no exception to this. While the government's focus on energy is seemingly unwavering across several fronts over decades, there continues to be a clamour for more, with the energy sector often comparing itself to the infrastructure sector in seeking indirect tax benefits.

While public infrastructure projects continue to enjoy a host of indirect tax exemptions, the power sector does not fare too well in comparison, particularly on the service tax front. For example, services provided to the government for the setting up as well as maintenance of public infrastructure works (such as roads, bridges, irrigation works to name a few) are eligible for service tax exemptions. While generation and distribution of power by the government enjoys tax exemption across indirect tax laws, there is no corresponding relief for various input service costs incurred for power generation. To make power available at a reasonable price for industrial as well as domestic consumption, service tax relief continues to be a key ask for this sector.

In India, while electricity is 'goods', the activity of generation and distribution has been notified to be a 'service' that is not taxable when undertaken by the government. This often leads to a debate of potential service tax levy on private sector-generated power, notwithstanding the fact that sale of power should be exempt as sale of 'goods' (electricity is exempt under central excise as well as VAT laws). There is clearly a need for parity in tax treatment.

Notwithstanding continued focus on clean and green power, the renewable power sector continues to be plagued with a persistent "inverted duty structure" on account of taxes (customs, excise, VAT as well as service tax) on the input side with the output being exempt. While the government has over the years sought to address this issue by withdrawing customs and central excise levies on specific inputs required for projects that generate wind and solar power, this has merely shifted the issue from the power project to manufacturers supplying intermediate products required for the setup of power projects. There is a need for this issue to be effectively addressed by ensuring the benefit of exemption percolates across the value chain.

Carbon credits are tradable instruments. There has historically been debates on whether tradable instruments are 'goods' liable to VAT or 'actionable claims' not liable to any tax. To mitigate such disputes and associated tax costs, there is a need for zero rating trade of carbon credits to incentivise this green instrument under the current as well as upcoming GST regime.

It should be interesting to see if the power sector continues to attract tax sops this Budget, thereby setting the stage for its treatment as essential goods for zero rating/lower tax rate under GST.

The author is Partner, BMR & Associates LLP. Views are personal