GST to pare price reduction gains made by the Indian solar industry

By Jasmeet Khurana, associate director, consulting, Bridge to India
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Jasmeet Khurana, associate director, consulting, Bridge to India Credit: Bridge to India

The Indian government seems to be ready to push through the much anticipated Goods and Services Tax (GST) bill in Parliament in the upcoming monsoon session (18 July to 13 August). If passed, the government will aim to implement the reformed tax regime from April 2017. A key proposal of the reform is to do away with a maze of taxes and exemptions therein and replace them with uniform tax structure across different states and product categories. While this new tax regime promises to be positive for the overall economy, it is not good for the solar industry which stands to lose several tax exemptions.

A committee constituted by the current government has recommended three tax slabs for GST: a standard rate of 17-18% for most items, a merit list where the rate would be 12% and a demerit list where the rate would be 40%. This is in addition to an exemption list of around 100 essential items where GST would be completely waived off.

The industry had been expecting solar cells and modules to find a place in the exemption list of around 100 essential items where GST would be waived off. However, this seems increasingly unlikely in view of recent comments made by minister Piyush Goyal where he said that the GST would help provide a level playing field to local manufacturing. Solar equipment would fall either under the standard list or merit list. In either scenario, the overall project cost is likely to increase and pare most of the price reduction gains made over the last 1-2 years.

Under the current regime, there is no tax or duty applicable on import of solar cells or modules as against an import duty of 26-29% applicable to most goods. As solar modules are often procured directly by the project developers, there is also no additional local tax. Under the GST regime, this nil rate would be replaced by a combination of basic custom duty and the applicable GST rate. It is expected that the basic custom duty will continue to be waived off for solar cells and modules but the standard GST rate will need to be paid.

The standard import duty for inverters in India is 28.44% but this is reduced to just 5.15% for solar projects. Therefore, the cost of imported solar inverters would also increase under the GST regime. However, many prominent international inverter suppliers assemble their inverters in India and tax inefficiencies weeded out by GST should benefit local manufacturing by providing them with a level playing field against imports.

Currently, VAT and/or a Central Sales Tax (CST) is applicable on sale of equipment within India. Several states including Uttar Pradesh and Rajasthan have completely waived off VAT, normally around 14%, for solar equipment and most other states have set it around the 5% mark. Excise duty on manufacturers is also waived off for items such as solar module mounting structures. As all these exemptions go away and VAT, CST and excise duty get replaced with GST, the project cost would undoubtedly increase. However, a part of this increase will be offset as a pass through will be allowed on the GST paid at the time of import and savings on multiple taxes and duties along the value chain.

The magnitude of actual cost increase will depend on the applicable GST rate and the procurement pattern. MNRE estimates the cost increase to be in the range of 12-16% for a GST rate of 20%. Now the question is, how do developers manage the risk of GST being implemented when they are bidding for projects and signing PPAs?

Most PPAs in India include a ‘change in law’ clause, wherein, any impact due to change in law is passed through to power off-takers. However, there is no precedence or a process in place for calculating the pass through impact of such a change for bidding based solar project. This uncertainty will be a cause of concern for the investors.

Post implementation of GST, distribution companies (Discoms’) willingness to buy more solar power at higher tariffs will also be affected and could pose another short-term challenge for the sector.

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