Tax waiver brings relief for power transmission utilities

Power exchanges, however, included in service tax net

Finance Minister Pranab Mukherjee’s decision to waive service tax on transmission of electricity has come as a relief for power transmission companies in the country. The Budget, tabled by Mukherjee on February 26, however, imposed tax on services provided by power exchanges.

The overall impact of the two moves is likely to have a limited benefit for the domestic power sector, according to experts.

Transmission firms, including Power Grid Corporation of India Ltd (PGCIL), India’s largest power transmission utility, and state transmission companies have long been opposing the 12 per cent service tax on their income.

Transmission of electricity is one of the seven services listed in the Finance Bill 2010 that are exempted from tax payment henceforth. The Finance Bill, presented along with the annual financial statement, gives details regarding the imposition, abolition, remission, alteration or regulation of taxes proposed in the Budget.

“This is a big relief for us. We have been objecting to this for long and our efforts have borne fruits now,” said PowerGrid Chairman S K Chaturvedi.

The Navratna public sector undertaking (PSU) was issued a show cause notice last year by the service tax department of the Central Board of Excise and Customs, for non-payment of over Rs 413 crore — which forms 28 per cent of the company’s annual profit — as the service tax on power transmission services for the period between May 2006 and September 2008.

The company had later approached the revenue department along with the power secretary to sort out the matter, as it contested that transmission service was not taxable. “The Rs 413-crore tax liability was slapped on us as power transmission was considered for service tax payment under the head of Business Support Services. Otherwise, power transmission is not written in the schedule of items on which service tax can be levied,” Chaturvedi said.

The tax exemption will also benefit the consumers who otherwise could have to pay extra for power as transmission companies pass on the service tax to them.

State transmission utilities, too, have expressed relief over the decision of tax waiver. “In this matter, the Budget has come as a major relief for us. The overall amount we were asked to pay by tax authorities in the show-cause notice was close to Rs 150 crore for the financial year 2005-06. They had levied 10-12 per cent service tax on our annual turnover. We had initially replied to the notice but nothing happened. Thus, we had no option but to challenge it in the high court and get a stay,” said a senior official from Gridco, one of the unbundled power utilities in Orissa.

In a meeting of state power ministers last November, five states, including Andhra Pradesh, Maharashtra and Karnataka, had sought the Union power ministry’s intervention to abolish the service tax levied on them. The power ministry had then taken up the matter with the finance ministry.

Experts believe that the decision might not be a big relief. “While the consumers will be definitely benefited, the overall impact will be small. Apart from the service tax, there are other input taxes like Customs duty and Value Added Tax incurred at various stages by the generation companies. All these taxes get built up in the tariffs significantly,” said Gokul Chaudhuri, partner, Energy and Infrastructure Practice at BMR Advisors.

The exchanges, however, have expressed their discontent at the government’s move. “The electricity market is still not fully developed. We are still stabilising the initial set of participants.

Keeping this in view, if the government had imposed the tax after 2-3 years, it could be understood. But now, this will push the price of traded power up as we will pass on the cost to the utilities’ bill,” said a senior official from a power exchange.