Impact of GST on Power Sector

Impact of GST on Power Sector

Electricity is the heart of growth of economy, it is critical for better development and sustained growth of the country. Constitutionally the proposed GST bill allows the levy of GST on all goods, other than those specified. Electricity is not amongst those goods, which are specifically excluded. Lets discuss today impact of GST on Power Sector.

Indian power sector is divided in 2 Major types:

  1. Renewable Power РSolar, Wind, SHP, BG, BP, U&I
  2. Non – Renewable Power – Coal, Gas and Oil

Lets look at the statistics of power industry:

SectorMW% of Total
State Sector103,96732.53%
Central Sector80,25725.11%
Private Sector1,35,38242.36%


FuelMW% of Total
Total Thermal218,33068.3%
RES (Renewable Energy Sources)50,01815.6%

Here we need to emphasis on the impact of GST on power sector, in power sector has 2 phases of life cycle:

Impact of GST on Power Sector

  1. CAPEX period (Construction)
  2. OPEX period (O&M)

Lets now look it individually the impact of GST on these phases:


This is the construction phase of the power plant where all the capital expenditures are being incurred. Construction phase can be 24 months to 48 months depending upon the size of power plant.

Lets look a the present scenario of tax structure involved in construction phase.

  • Excise duty exemption is provided to OEM companies for any goods supplied to Power Generating Companies for contracts awarded under International Competitive Bidding. (Notification No.12/2012- CE, dt 17.03.2012 – Si. No.336).
  • All other equipments can be purchased against “C” form at 2% CST.
  • Declared goods can purchased at 5% VAT and other goods at applicable state VAT rates.
  • Custom duty is exempted for specified goods used in setting up, expansion of power project.
  • For Civil and Service contract all input service tax credit received is cost since output product is exempted from taxes.

Now lets have a comparative look at scenario in GST regime:

For Import of Capital Goods:

Comparison of Import of Capital goods in GST regime
Comparison of Import of Capital goods in GST regime

From the above it can be noted that at present there is complete exemption from taxes like BCD, CVD etc. However in GST regime although BCD will remain exempt it is likely that IGST will be applicable on import of goods at 18%. This will result in drastic increase in cost of capital goods. Moreover input credit of IGST will not be available since electricity is kept out of purview of GST.

For Domestic procurement of Capital Goods:

Comparison of Domestic procurement of capital goods in GST regime
Comparison of Domestic procurement of capital goods in GST regime

At present there is exemption notification for excise on capital goods supplied to power generating companies. GENCO generally purchase such capital goods at 2% CST against Form- “C”. Now in GST there will not be any concept of “C” form hence full rate of GST will be applicable. Total cost will increase by 16% (18%-2%) in GST when capital goods are purchased from domestic market.

Civil Works:

At present service tax is leviable on civil works at full rate of 15% or concessional rate as the case may be. Such service tax paid is cost to company and no input credit is available. In GST regime 18% GST will be charged which will also be cost to company. Hence there will be minor increase in cost of civil works.

EPC Model

In Power Sector EPC (Engineering, Procurement and Construction) is also equally popular model since construction of power plant involves several works. Now lets look at the impact of GST on EPC model.

At present EPC contractor supply the goods from OEM companies (like BHEL, Toshiba etc.) to Power Generating company or say Principal Company directly. Look at the below chart:

Comparison of EPC Model in GST regime
Comparison of EPC Model in GST regime





At present in EPC model Generating Companies give order to EPC company, in turn EPC company give sub-contract to OEM Companies, OEM companies then supply goods directly to Generating Company under RR Sales/ 6(2) Sales / In transit sales.

2% CST is charged in present scenario, since goods are sold under RR Sales no tax is leviable on margin of EPC company. However in GST concept of RR Sales is removed. hence every sale transaction is charged to GST. So instead of 2% CST , 18% GST will be levied moreover on the margin of EPC company also GST will be charged. There will be substantial cost increase in the GST mode. There will be question whether EPC model will prevail in such conditions??

2. OPEX (O&M Phase)

In O&M phase there is main requirement of fuel: in Primary fuel there is requirement of Coal and secondary fuel there is requirement of HSD, Limestone etc.

VAT and Entry tax is not applicable on sale of electricity. No Interstate tax is levied on sale of electricity.

Excise duty on coal is a levied at 2% without tax credit and 6% with credit. Excise duty on other fuel is applicable ranging from 10% to 15%.

At present Coal us under declared goods so VAT on that can not exceed 5%. So coal can be procured at 5% VAT or 2% CST. VAT on secondary fuels vary from 12.5% to 20%.

Clean Energy Cess is charged at Rs. 400/ MT on coal. Credit of same is not available.

Service tax on any services received during O&M period is cost to company.

Now in GST era following changes are expected:

Coal may subject to concessional rate of GST around 8% to 12% – which is much higher than present rates.

Other secondary fuels may be charged at normal GST rate of 18%, this may not impact much on cost structure since at present also there is excise at VAT applicable.

It is decided that Clean Energy Cess is charged at Rs. 400/ MT on coal will continue in GST also.

GST levied on any services received during O&M period will be cost to company since electricity is out of purview of GST.


  • Drastic Increase in Capital Expenditure
  • Increase in working capital requirement
  • Increase in O&M cost
  • Ultimate increase in rate of electricity – increase in cost to aam admi
  • Inflation

Way Foreward:

With introduction of GST it is expected that power sector face many issues. We have discussed the impact of GST on Power Sector, now lets discuss what can be our tools to minimize the impact.

  1. Trigger “Change in Law”clause of PPA – Most of PPA has one clause¬† which is “Change in Law”, under the circumstances where prevailing law gets changed and due to that there is increase in cost then PPA rates can be revised to cover such increase in cost. However this route is lengthy and complex, since it is to be proved in court of law that there is increase in cost due to GST. It may take up to 2 years to get the decision. However if in PPA there is no such clause then such company may face huge impact.
  2. Electricity to be within GST – At present electricity is kept out of GST mechanism, however it may proposed to government to keep electricity within GST cycle and keep it Zero Rated Goods. So that Power Generating Company come within the CENVAT cycle and they claim refund of input credit availed by them.
  3. Deemed Export – It can also be proposed to government that any supply to Mega Power Plant, UMPP (Ultra Mega Power Plant) shall be deemed export for the supplier. hence supplier will not charge any tax on supply of goods to Mega Power Plant or UMPP. and he will get refund of input credit paid on manufacturing of such goods.

We hope that Impact analysis of GST on Power Secor will be useful to our readers. Stay tuned for more updates on GST.

Give your feedback or ask query on “Impact of GST on Power Sector” in comments below or mail at

Source: Power Sector Statistics –

Author: smit shah

I am a passionate Chartered Accountant having deep interest in taxation with combination of blogging.

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