INDIA BUSINESS WORLD - FEBRUARY 2007
The Month that was ...

SERVICE TAX TO MAKE T&D LOSS FOR CONSUMERS

POWER consumers may be in for some rude shocks on the tariff front. The government has proposed bringing the power transmission and distribution industry under the service tax net. If the levy is imposed, it could push up power tariffs by an extra 5%. The proposed imposition of tax comes even as power companies are facing the heat of increased fuel costs. Both fuel cost and the service tax will be added to the electricity charges paid by the consumer.

On an average, distribution costs are Re 1 per KWH. A service tax of 12.5% imposed on distribution would raise costs accordingly. Add to that the cost of the tax on transmission and tariffs could escalate by almost 5%. Average tariffs on power are Rs 3 per unit. While the low-end consumer pays a lower tariff, high-end consumers such as industrial users pay much higher tariffs.

Distribution services are proposed to be transferred to states. The Centre will, however, retain transmission services as these are inter-state in nature. This means the revenues from distribution services will go entirely to the states. The distribution services are set to be transferred to states next year as this would require a Constitutional amendment.

Distribution companies operate at the state level, distributing electricity to power consumers within the state. Transmission utilities such as Power Grid Corp normally operate at the inter-state level transmitting power from one state to another. The power industry has so far been kept out of the tax net and transmission and distribution companies do not have to pay either excise duty or sales tax on sale of electricity. They however, pay excise and sales tax on equipment bought for the transmission and distribution projects.

According to an official in a private distribution company, "Imposition of a tax on the sector will go against the policy. Efforts are on at every level to reduce costs on the generation, transmission and distribution side and adding taxes only increases costs. Ultimately, it is the consumer who has to pay a higher bill."