GST treatment of utility charges: capitalised ITC allowed with apportionment, but additional surcharge taxed while wheeling and banking charges stay exempt.

A Karnataka AAR held that a Government-owned applicant was neither a "Governmental Authority" nor a "Local Authority", so it remained liable to file Form GSTR-9 and GSTR-9C. It also ruled that input tax credit is available on capitalised inward supplies and on reverse charge tax, but only to the extent permitted under section 17(2) and Rules 42 and 43 where exempt supplies are also made. Additional Surcharge collected from open access consumers was treated as taxable consideration under GST. Wheeling and Banking Charges, however, were held exempt as charges connected with exempt electricity transmission or supply.

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Issues: (i) Whether the applicant is a "Governmental Authority" or "Local Authority"; (ii) whether it is exempt from filing annual return in Form GSTR-9 and Form GSTR-9C; (iii) whether input tax credit is available on inward supplies of goods and services that are capitalized, and on inward services and taxes paid under reverse charge, subject to proportionate reversal where exempt supplies are also made; (iv) whether Additional Surcharge collected from open access consumers is taxable under GST; and (v) whether Wheeling and Banking Charges are taxable under GST.

Issue (i): Whether the applicant is a "Governmental Authority" or "Local Authority"

Analysis: The definition of "governmental authority" under the GST exemption notification is confined to its own context and requires both substantial Government participation and carriage of functions entrusted to a Municipality or Panchayat. The applicant satisfied the ownership limb, but its activities were not shown to be confined to the relevant municipal or panchayat functions in the manner required by the definition. It was also not a local authority.

Conclusion: The applicant is neither a "Governmental Authority" nor a "Local Authority", against the assessee.

Issue (ii): Whether it is exempt from filing annual return in Form GSTR-9 and Form GSTR-9C

Analysis: The second proviso to section 44 applies only to a department of the Central Government, a State Government, or a local authority whose accounts are audited by the Comptroller and Auditor General of India or an auditor appointed for local authority accounts. A Government-owned company does not fall within that limited class.

Conclusion: The applicant is not exempt from filing annual return and reconciliation statement, against the assessee.

Issue (iii): Whether input tax credit is available on inward supplies of goods and services that are capitalized, and on inward services and taxes paid under reverse charge, subject to proportionate reversal where exempt supplies are also made

Analysis: Credit under section 16 is available on input tax charged on goods or services used in the course or furtherance of business, even if capitalized, unless specifically barred. Where both taxable and exempt supplies are made, section 17(2) restricts credit to the portion attributable to taxable supplies, and the apportionment is to be worked out under Rules 42 and 43. Taxes paid under reverse charge also retain the character of input tax, subject to the same apportionment.

Conclusion: Input tax credit is available on capitalized inward supplies and on reverse charge tax, but only subject to section 17(2) and Rules 42 and 43, in favour of the assessee with restrictions.

Issue (iv): Whether Additional Surcharge collected from open access consumers is taxable under GST

Analysis: The surcharge is recovered from consumers who shift to open access and is a charge for tolerating or permitting the relevant arrangement rather than a direct charge for transmission or distribution of electricity. It therefore answers the statutory concept of supply for consideration under section 7(1). Its character is not altered merely because the amount is linked to electricity procurement economics.

Conclusion: Additional Surcharge is taxable under GST, against the assessee.

Issue (v): Whether Wheeling and Banking Charges are taxable under GST

Analysis: Wheeling charges are part of the consideration for transmission or distribution of electricity and fall within the exemption for services of transmission or distribution of electricity by an electricity transmission or distribution utility. Banking charges, on the facts recorded, represent consideration connected with electricity supply and are covered by the exemption for electricity itself. The form of consideration, whether in money or in kind, does not alter the exemption where the underlying service or supply is exempt.

Conclusion: Wheeling and Banking Charges are exempt from GST, in favour of the assessee.

Final Conclusion: The ruling is mixed: the applicant succeeds on capitalized input tax credit, reverse charge credit subject to apportionment, and exemption for wheeling and banking charges, but fails on governmental authority status, annual return exemption, and taxability of additional surcharge.

Ratio Decidendi: Credit is available on input tax used in business, including on capitalized inward supplies and reverse charge tax, but where both taxable and exempt supplies exist, credit must be apportioned; charges that are consideration for a distinct taxable supply are taxable, while amounts tied to the exempt transmission or distribution of electricity remain exempt.

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