The Karnataka Appellate Authority for Advance Ruling (AAAR) recently ruled that no Goods and Services Tax (GST) may be levied on additional surcharges paid by Open Access (OA) Consumers to government-owned electricity suppliers.
The application before the AAAR was filed by M/s Chamundeshwari Electricity Supply Corporation Limited (CESCL), a public sector company owned by the Government of Karnataka, engaged in the distribution and supply of electricity in the districts of Mysore, Mandya, Kodagu, Chamarajanagar, and Hassan. CESCL is registered under the Central Goods and Services Tax Act, 2017 (CGST Act) and the Karnataka Goods and Services Tax Act, 2017 (KGST Act).
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The additional surcharge is a statutory levy under Section 42(4) of the Electricity Act, 2003, and is collected to recover stranded fixed costs incurred by electricity distribution companies like CESCL.
CESCL does not charge GST on the supply of electrical energy and distribution of electricity, as these activities are exempt under Sl. No. 104 of Notification No. 2/2017-CT(R) and Sl. No. 25 of Notification No. 12/2017-CT(R). However, the company charges GST on various support services such as application fees, registration fees, meter testing charges, and installation charges, among others. The additional surcharge collected from OA Consumers is part of the tariff approved by the Karnataka Electricity Regulatory Commission (KERC) and is not a standalone charge.
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OA Consumers are entities that purchase electricity from private generators instead of CESCL, invoking the open access clause under the Power Supply Agreements (PSAs). When OA Consumers opt to buy electricity from private generators, CESCL is still obligated to pay fixed costs to its own power generators under Power Purchase Agreements (PPAs).
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To recover these stranded fixed costs, CESCL levies an additional surcharge on OA Consumers, as permitted under Section 42(4) of the Electricity Act, 2003, read with the Tariff Policy, 2016, the National Electricity Policy, and the Karnataka Electricity Regulatory Commission (KERC) Regulations.
In the preceding stage, Authority for Advance Ruling (AAR) had ruled that the additional surcharge collected by CESCL was a consideration for tolerating an act and thus taxable under Section 7(1) of the CGST Act. CESCL appealed this decision, arguing that the additional surcharge was not a consideration for any supply of goods or services but rather a recovery of stranded fixed costs mandated by law.
The two-member Bench of the AAAR, comprising Pramod Kumar Agrawal and Shikha C, observed that the additional surcharge levied under the Electricity Act is ancillary to the principal supply of electricity, which is exempt from GST under Notification No. 2/2017-CT(R) and Notification No. 12/2017-CT(R). The AAAR also referred to the CBIC Circular No. 178/10/2022-GST, which clarified that payments such as liquidated damages or penalties do not constitute consideration for tolerating an act unless there is an independent agreement to do so.
Accordingly, the AAAR set aside the AAR’s ruling and held that the additional surcharge collected by CESCL is exempt from GST as it forms part of the tariff for the supply and distribution of electricity, which is exempt under Notification No. 2/2017-CT(R) and Notification No. 12/2017-CT(R).
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