How Will GST Reforms Benefit State Discoms?
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Synopsis
Discover how the latest Goods and Services Tax reforms are set to transform the financial landscape for state-owned power distribution companies. This insightful report reveals the potential benefits, challenges, and regulatory changes impacting discoms and the electricity sector.
Key Takeaways
- GST reforms are expected to benefit state discoms.
- Current tariff hikes are insufficient to cover debts.
- A significant ACS-ARR gap necessitates further increases.
- Regulatory assets remain high at Rs 3 lakh crore.
- Coal GST adjustments could reduce supply costs significantly.
New Delhi, Sep 16 (NationPress) A recent report highlights that the Goods and Services Tax (GST) reforms are poised to provide substantial advantages to state-owned electricity distribution companies, commonly known as discoms. The 1.9 percent tariff increase instituted by these discoms in FY26 is insufficient to address their mounting debts, as indicated by the ratings agency ICRA.
The average cost of supply to the revenue realized across India, termed the ACS-ARR gap, currently stands at 46 paise per unit. To bridge this gap, a 4.5 percent tariff rise and a reduction in Aggregate Technical & Commercial (ATC) losses are essential, according to the report.
Moreover, the report notes that regulatory assets, which represent unpaid dues and tariff discrepancies, remain alarmingly high at Rs 3 lakh crore.
The report states that the adjustment of GST rates on coal from 5 percent to 18 percent, along with the elimination of a compensation cess of Rs. 400 per ton, is anticipated to lower the generation costs for coal-based power producers.
As coal-based generation constitutes over 70 percent of total electricity generation in India, this change is expected to lower discoms' supply costs by approximately 12 paise per unit.
The Supreme Court has mandated all state electricity regulatory commissions (SERCs) to settle legacy regulatory assets within a four-year timeframe while capping the creation of new assets to 3 percent of the annual revenue requirement.
To comply with this ruling, substantial tariff hikes and a reduction in aggregate technical and commercial losses to below 15 percent are necessary. States like Tamil Nadu, Uttar Pradesh, and Rajasthan are primarily responsible for most of the regulatory asset accumulation.
Furthermore, Girishkumar Kadam, Senior Vice President and Group Head - Corporate Ratings at ICRA, mentioned that the implementation of the Fuel and Power Purchase Adjustment Surcharge (FPPAS) mechanism varies significantly across states, hindering cost pass-through.
The Appellate Tribunal for Electricity (APTEL) has been tasked with overseeing adherence to the court's directives.
Point of View
The recent GST reforms present an opportunity for state discoms to alleviate financial burdens while addressing regulatory challenges. However, achieving compliance with judicial mandates and reducing losses will require strategic planning and execution.
NationPress
21/09/2025
Frequently Asked Questions
What are GST reforms?
GST reforms refer to the changes made to the Goods and Services Tax system, which aim to streamline taxation and improve financial outcomes for various sectors, including electricity distribution.
How will GST reforms help discoms?
The reforms are expected to lower generation costs for coal-based power, which can lead to reduced supply costs for discoms and help them manage their financial obligations.
What is the ACS-ARR gap?
The ACS-ARR gap is the difference between the average cost of supply and the average revenue realized, indicating the financial health of electricity distribution operations.
Why is the Supreme Court involved?
The Supreme Court has mandated state electricity regulatory commissions to settle legacy regulatory assets to ensure financial stability and accountability within the sector.
What challenges do discoms face?
Discoms face challenges such as high debt levels, inadequate tariff adjustments, and the need to reduce technical and commercial losses to comply with regulatory requirements.
