From September 22, 2025 onwards, the GST rate on various renewable energy components will be reduced from 12 per cent to 5 per cent, bringing down the cost of essential equipment such as solar cells, solar power-based devices such as solar cookers and solar lanterns, biogas plants, wind-operated systems, waste-to-energy devices, ocean wave and tidal wave energy devices, and fuel cell motor vehicles.
This move to reduce the GST rate across the entire spectrum of clean energy, including solar, wind and bioenergy, has been welcomed by the industry. The reduction in project capital costs is expected to drive down renewable energy tariffs, resulting in greater green power offtake and increased competitiveness in the sector. This will also help strengthen domestic manufacturing capabilities in the renewable energy sector.
While GST on renewable energy equipment has been reduced to 5 per cent, tax on coal and lignite has been hiked to 18 per cent. To balance this, the separate carbon cess on coal has been removed. This new GST structure not only sends a strong signal that green power will attract lower taxes compared to coal, but also effectively simplifies taxation.
With this new reduced GST rate applicable on renewable energy components, it will be interesting to see the reaction of procurers, mainly discoms. In 2017, when GST was first introduced, regulators allowed developers to receive compensation to offset its high cost implications. Now, with the tables turning and costs decreasing for developers, discoms might seek compensation from regulators. Thus, regulatory clarity is essential to avoid any delays in the signing of new power purchase agreements or disruptions to already signed contracts.
Any such flux, if it arises, is likely to be short term. In the long term, the lower tax rates will accelerate project build-out in the renewables sector.
