Given that the renewable energy sector currently benefits from various tax exemptions and concessional duties, the impact of the goods and services tax (GST) on the total delivery cost of renewable energy is a key concern for stakeholders across the value chain. Industry experts share their views on the impact of GST regime on renewables…
Reducing tax exemptions is one of the underlying principles of GST. In your opinion, how will it impact renewable project development?
The solar industry has enjoyed several tax exemptions in the past. States such as Rajasthan, Uttar Pradesh and Haryana have had zero value added tax (VAT) on solar equipment so far. Solar modules could be imported at zero effective import duty and inverters at 5 per cent effective import duty. Large structure manufacturers could claim excise refund, which was passed through to the customer. There is no doubt that under GST the overall indirect tax incidence will increase on solar projects. However, we do not see any negative impact on the growth prospects of the industry as the price reduction is expected to offset any increase in tax outgo. The timing is also well suited from a solar industry perspective, as module prices are likely to fall by 5-7 per cent during the next quarter, for feed-in tariffs (FiTs) in China.
L. Badri Narayanan
Tax exemptions are extremely important for renewables as they help offset the higher cost of power generation from these technologies. Further, conventional electricity is not likely to attract GST as it is outside the GST regime at present. So, keeping the rates for renewables at the minimum is essential. However, in the GST regime, tax exemptions are not likely to exist. The best option for renewables would be to be taxed under the lowest slabs. The Constitution (One Hundred and First Amendment) Act, 2016 has not altered the power of the state government to collect electricity duty. Taxes on the consumption or sale of electricity in terms of Entry 53 of List II of the Seventh Schedule will be collected by the state government. Accordingly, electricity is being kept outside the GST regime for the time being. The tax exemptions break the credit chain, leading to a cascading of taxes and increasing the tax incidence on the final consumer.
In the case of renewable energy, the inputs/capital goods used by the sector enjoy various tax exemptions from excise duty and VAT, based on the end use. Such end-use-based exemption may not be continued under the GST regime. The exemption list released by the GST Council is not catering to the same. Inputs and capital goods are attracting GST at a higher rate, which cannot be offset. This will lead to an increase in the tax incidence on the final power tariff, thus impacting power tariffs in future auctions and current bids and agreements submitted to the government.
GST in India is based on the concept of credit fungibility and reduction of exemptions, its introduction is likely to affect the very fundamentals of how business is carried out in India. The overall impact of GST on project cost and subsequently the cost of generation depends on the GST rate imposed, the procurement pattern (import versus domestic purchase) and the various exemptions and concessional duties offered to the renewable energy industry. Taxes on the consumption or sale of electricity have been kept outside the GST regime as the power to levy taxes on the consumption or sale of electricity has been provided to the state governments vide Entry 53 of List II of the Seventh Schedule of the Constitution, which has not been subsumed under GST. Taxes thus paid on the procurement and installation of renewable assets would continue to be non-creditable and thus the increase in tax costs is bound to increase project development cost. In the short term, the initial project development cost may increase by 3-4 per cent, but it will not have any negative impact as developers will continue to remain aggressive. Overall, a smooth transition is anticipated and the sector is not likely to suffer any substantial long-term impact.
What is the current tax structure for solar and wind power equipment and projects? How will it change post-GST?
Zero effective import duty on solar modules will increase to 5 per cent as the Integrated Goods and Services Tax (IGST) will have to be paid on modules. The effective import duty on inverters is also likely to increase due to the imposition of IGST in addition to basic customs duty. If the IGST on solar inverters is 5 per cent, the impact on project costs should not be very high. More clarity from the government is required on the indirect tax incidence on solar inverters, including components used in the domestic assembly of inverters.
L. Badri Narayanan
For solar and wind equipment, the excise duty (subject to conditions) is zero. The VAT applicable is around 5 per cent and the service tax on construction and erection services is 15 per cent. After GST, solar and wind equipment would attract 5 per cent tax while construction and erection services would attract 18 per cent. The increase in the GST rate after the withdrawal of exemptions/concessions will have a negative impact on renewables. GST paid on the input side at a higher rate will become a part of the cost of renewable power, and it will not be offset against electricity duty.
Multiple indirect taxes are currently levied on transactions in India. Of these, some are collected by the central government (additional duty of customs, special additional duty of customs, central excise duty, service tax, central sales tax, central surcharges and cess related to the supply of goods and services), while others are collected by the state governments (state VAT, luxury tax, octroi, entry tax, purchase tax, entertainment tax, state surcharges and cess, etc.). All these taxes will now be subsumed under GST while a few others such as basic customs duty and stamp duty will stay outside GST. GST at the applicable rate would be levied on the supply of all classes of goods and services except those that are excluded from the GST regime. In addition, various exemptions currently provided on capital goods and inputs used in renewable energy projects will be pruned, thus increasing the tax cost burden on the sector.
The GST rate schedule conveyed after the GST Council meeting held on May 18, 2017 indicated a 5 per cent GST rate for “renewable energy devices and spare parts for their manufacture”. It further identified solar power-based devices, solar power generating systems, windmills and wind-operated electricity generators. However, photovoltaic cells, whether or not assembled as modules or made up into panels, were separately included in the 18 per cent tax slab. An official confirmation from the finance ministry after the 15th meeting of the GST Council put all uncertainties to rest, confirming a 5 per cent rate for all equipment and devices, which is rational and consistent with government the guidance leading up to the rates announcement.
How is GST likely to impact future costs and tariffs for renewable projects?
We expect future costs and tariffs to continue to fall despite GST implementation.
L. Badri Narayanan
If the effective tax rate of 18 per cent is applicable on construction and erection, it may increase the project cost. Therefore, there may be a need to increase the tariff accordingly. However, the impact is likely to be lower than that on conventional power sources. This is because the conventional power sector is not enjoying many duty concessions at present as compared to renewable energy.
The very idea of a homogenised tax structure is a great step in reducing the overall intricacies and bringing more clarity in the sector. In terms of the short-term impact, both costs and tariffs for solar and wind are likely to increase marginally under the FiT mode; however, with the competitive bidding regime, the impact will be subdued. Solar power bids have already dropped to as low as Rs 2.44 per kWh, which is even below the average power purchase cost of many discoms, and wind power is at Rs 3.46 per cent kWh despite only one bid (auction for 1 GW). Hence, the long-term prospects of the industry would not be impacted by the GST move as an increase in tax rates will be quickly neutralised by falling costs. We do foresee significant efforts being made on the operational side. The industry would feel the need to reassess procurement strategies to minimise the loss of tax credits. GST will affect how companies operate their businesses, making it not just a tax reform but an overall business reform.
What will be the impact of GST on the conventional power sector (thermal, coal, nuclear, large hydro)?
We understand that effective taxation on coal may be lowered marginally, possibly resulting in slightly lower tariffs. The tax incidence on most capital goods stands unchanged, so the impact on the power sector will be minimal.
L. Badri Narayanan
Since electricity is likely to be outside the scope of GST, the GST on inputs will be an additional cost. Given the effective rate of tax on goods at 18 per cent/28 per cent, the cost of conventional power is expected to increase under the GST regime.
One of the notable highlights of GST has been its impact on the thermal sector, particularly coal, which has been included in the 5 per cent tax slab, much below the current tax rate of 11.69 per cent. This will help in not only curbing corruption in the coal sector but increase the interest of developers in setting up thermal power plants. It will also allow discoms to provide power at affordable rates.
The reduction in the tax rate on domestic coal will bring down the cost of power generation, even after taking into account the increase in capital cost due to higher tax rates in the boiler, turbine and generator segment. However, the scenario will be different for imported coal generators that entail basic customs duty.