Power Play or Power Overreach? Why GST on Electricity Reimbursements via Circular Sparks a Constitutional Storm

Introduction - The Spark That Lit the Debate

Electricity is more than a commodity-it is the pulse of India’s homes, industries, and services. Recognizing its essential nature, lawmakers have consistently kept it outside the ambit of indirect taxes like GST. Yet, a recent CBIC circular has jolted this settled position by suggesting that electricity charges recovered by landlords from tenants could be subject to GST when part of a rental arrangement.

While presented as a clarification, this interpretation raises a critical question-can an administrative instruction alter the constitutional and statutory framework that protects electricity from GST? Or is this a case of policy overreach, where an executive body steps into the role of the legislature?

Electricity & GST - The Legal Bedrock

The Indian Constitution precisely allocates taxation powers between the Union and States:

• Article 246 read with the Seventh Schedule assigns Entry 53 of the State List exclusively to states for imposing tax on consumption or sale of electricity.

• Article 248 and Entry 97 of the Union List give residuary powers to Parliament-but not over subjects explicitly assigned to states.

Reflecting this constitutional divide, Notification No. 12/2017-Central Tax (Rate) exempts the transmission and distribution of electricity from GST. This isn’t a casual policy choice-it’s a deliberate recognition of electricity as a public utility that must remain tax-light for public welfare.

The CBIC Circular No. 206/18/2023-GST dated 31.10.2023 A Change in Current

The controversial CBIC circular no. 206/18/2023-GST argues that when landlords recover electricity or water charges from tenants-even when billed separately-such amounts can be treated as part of the “composite supply” of renting services and taxed accordingly.

On paper, this may seem like a mere interpretation. In reality, it is a significant shift. If enforced, landlords could be compelled to charge GST on reimbursements, maintain additional compliance records, and issue tax invoices for expenses that are essentially pass-through costs from the DISCOM to the tenant.

Why This Interpretation Faces Legal Headwinds

1. Circulars Cannot Override Law

The Supreme Court in Commissioner of Central Excise v. Ratan Melting & Wire Industries (2008(10)LCX0001) held that circulars contrary to statutory provisions are not binding. Executive directions cannot impose tax without legislative sanction. The GST exemption on electricity exists under a valid notification; altering it requires an amendment, not a memo.

2. Definition of ‘Supply’ Not Met

Under Section 7 of the CGST Act, 2017, a “supply” involves consideration and commercial intent. A landlord collecting actual electricity dues is not engaged in commerce-merely recovering costs paid to a utility provider

3. Misuse of Composite Supply Doctrine

“Composite supply” applies when goods or services are naturally bundled and supplied together. Here, electricity is consumed independently by the tenant, billed separately, and supplied by a third party. Clubbing it with rent stretches the definition beyond reasonable limits.

Practical Fallout - Real Estate in the Crosshairs

If this interpretation stands:

• Commercial landlords would face fresh compliance burdens-meter-wise billing, GST registration, and tax remittances.

• Residential rentals, currently exempt in many cases, could see disputes where utility recovery is involved.

• Tenants-both corporate and individual-might face higher rental outflows as landlords pass on the GST cost.

This isn’t just about paperwork; it’s about altering the financial equation of thousands of tenancy contracts mid-stream.

Fiscal Federalism at Risk

Electricity taxation belongs constitutionally to the states. Bringing it under GST through an administrative circular risks upsetting the federal balance envisaged by the Constitution. If allowed, it could set a precedent where executive bodies bypass legislative processes to expand the tax net in other sensitive areas.

Litigation is Inevitable

Such a policy shift, if enforced without legislative change, is fertile ground for legal challenges. Courts have historically sided with taxpayers where executive interpretations exceeded statutory authority-especially in areas where constitutional boundaries are clear.

Potential grounds of challenge include:

• Violation of Article 246 & State List authority

• Contradiction with existing GST exemption notification

• Lack of legislative backing for new tax liabilities

• Breach of natural justice for retrospective application

Policy Choices - Clarify or Codify?

If the government truly intends to tax electricity reimbursements:

1. Amend the law or notification after consulting states via the GST Council.

2. Provide prospective application to prevent retrospective demands.

3. Clearly define composite supply boundaries to avoid similar disputes.

Until then, the CBIC could withdraw or revise the circular to align with the settled exemption, preventing unnecessary litigation and restoring taxpayer trust.

Conclusion - More Than Just a Clarification

This is not a mere compliance note-it is a litmus test for rule-of-law-based taxation. Electricity’s GST exemption is grounded in both constitutional design and public policy. Altering its scope via a circular risks eroding legal certainty, fiscal federalism, and taxpayer confidence.

The question is not whether the government can collect more revenue-it’s whether it can do so without legislative sanction. If tax policy starts to shift through administrative convenience rather than lawful process, every exemption could be just one circular away from extinction.

Until courts provide clarity, landlords, tenants, and tax professionals must stay alert-because in this power struggle between statutory protection and executive interpretation, the stakes are much higher than the electricity bill.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.