ELECTRICITY EXCHANGE SERVICES

[Dr. Sanjiv Agarwal]

Service tax has been imposed on electricity exchange services viz, in relation to trading, processing, clearing or settlement of spot contracts, derivatives etc. provided to any person by the Finance Act, 2010 w.e.f. a notified date. The gross amount charged for such services shall be liable to service tax.

Meaning of Electricity Exchange

The term 'electricity' is defined in section 2(23) of the Electricity Act, 2003 to mean electrical energy-

(i) generated, transmitted, supply or traded for any purpose, or

(ii) used for any purpose except the transmission of a message.

The term 'electricity exchange' has not been defined by the Finance Act, 1994 or 2010. However, in recent past, electricity exchanges have been set up in India for dealing in transactions in electricity which is neither a good (not covered by commodity exchange) or a security (not covered by stock exchange).

An electricity exchange is a platform on which buyers and sellers of power come together to trade.

It is not a market but a host to the market. The electricity exchanges are online electricity markets for promoting a fair, transparent and orderly market in a manner consistent with the Electricity Act 2003 and India Electricity Grid Code.

The electricity exchanges provide the following -

(i) infra structure  for trading, clearing and settlement of electricity contracts.

(ii) automated and transparent clearing and settlement for traded electricity contracts.

(iii) ready market for the distribution entities for meeting top up demand.

(iv) market place for buyers to meet any additional demand over and above normal demand.

(v) market place for new merchant capacities such as hydro power, renewable energy etc.

(vi) fair price discovery mechanism guaranties timely payment to sellers.

The service provider being an electricity exchange should be approved by the Central Electricity Regulatory Commission (CERC) which is a regulatory authority under the Electricity Act, 2003 . Such exchanges deal in facilitating the transactions in spot and forward contracts in electricity and are liked other exchanges viz, stock exchange, commodities exchange , bullion exchange etc.

Presently there are two electricity exchanges in the country, viz

(i) Indian Energy Exchange Ltd, 100/ 1. Ground Floor, Capital Court, Munirka, New Delhi - 110067

(ii) Power Exchange India Ltd, 3rd Floor, Bwing, Exchange Plaza, Bandra Kurla Complex, Bandra (east), Bombay - 400051

India's first national online electricity trading platform, Indian Energy Exchange (IEX) was accorded approval on 9th June, 2008 to commence its operation by CERC. IEX is a demutualised exchange that is expected to facilitate efficient price discovery and price risk management in the electricity market. IEX's members included power generators, distributors and industrial users. Financial Technologies (India) Ltd founder and promoter of Multi Commodity Exchange of India Ltd (MCX), owns a 51% stake in the IEX. The IEX initially started trading spot contracts followed by future trading in electricity. Later, India first institutionally promoted power exchange , namely Power Exchange India Limited (PXIL) was also granted regulatory approval by CERC on 30th September, 2008 to begin operation. PXIL is promoted by NSE and NCDEX and other stakeholders.

Later, PXIl received approval on 31st August, 2009 to introduce longer tenure physical delivery products in the form of weekly and day-ahead contingency products . PXIL launched the trading of both these products September 2009.

As per section 76 of the Electricity Act, 2003, Central Electricity Regulatory Commission (CERC) shall be established for discharging the functions under the Act which inter alia include regulating of electricity exchanges.

Taxable Service

Section 65( 105) (zzzzs) defines taxable service in relation to electricity exchange as under-

Any service provided or to be provided to any person, by an electricity exchange, by whatever name called, approved by the Central Electricity Regulatory Commission constituted under section 76 of the Electricity Act, 2003, in relation to trading, processing, clearing or settlement of spot contracts, term ahead contracts, seasonal contracts, derivatives or any other electricity related contract.

To be a taxable service, following conditions should be satisfied -

(a) service should be provided by an electricity exchange

(b) electricity exchange must be approved by Central Electricity Regulatory Commission

(c) services rendered should be in relation to transactions in electricity

(d) transaction should be of any type of contract in electricity

(e) contracts in electricity transaction may be-

(i) spot contracts

(ii) term ahead contracts

(iii) seasonal contracts

(iv) derivatives

(v) other electricity related contracts

(f) service shall be in relation to assisting, regulating or controlling the business of electricity transactions

(g) transactions should be for trading, processing, clearing or settlement of electricity transactions pertaining to sale or purchase of electricity by authorized associations .

Departmental Clarification

CBEC has clarified as follows vide circular No 334/1/2010-TRU dated 26.2.2010-

"6. Services provided by Electricity Exchanges

6.1 Under 'Forward Contract Service', tax is payable by exchanges who offer assistance in sale of goods or forward contracts in commodities. However, only forward contracts covered by the Forward Contract (Regulation) Act, 1952 are covered in the scope of taxation In the recent past, exchanges have been set up for transactions in electricity. The Central Electricity Regulatory Commission authorizes such exchanges. Since electricity exchanges are not covered by Forward Market Regulations, such transactions are not covered under the commodity exchange taxation. The proposed new service seeks to tax the charges recovered for services in relation to assisting, regulating, controlling the business of trading, processing and settlement pertaining to sale or purchase of electricity by the associations authorized by Central Electricity Regulatory Commission".

Value of Taxable service

Gross charges recovered by electricity exchanges for services in relation to electricity transactions shall be liable to service tax.

Specific Exemption

Vide Notification 11/2010-ST dated 27.2.2010, the taxable service provided for transmission of electricity has been wholly exempt from levy of service tax under section 66 of the Finance Act, 1994.

Person Liable

Electricity exchanges duly approved by the Central Electricity Regulatory Commission shall be liable to pay service tax on the charges recovered for the taxable services rendered