While India's Budget promises modest effects on solar, the GST may hit the sector. Credit: Welspun Renewables
India’s Ministry of New and Renewable Energy (MNRE) has requested comments and views from the renewables industry on how the upcoming Goods and Service Tax (GST) Bill may impact the delivered cost of renewable energy.
MNRE commissioned a study in July 2015 to understand the implications of the GST on the delivered cost of renewable energy. The new tax is due to come into force from 1 April this year. However, since the details of GST law are not yet available in the public domain, the report was based on certain assumptions.
It estimated that the implementation of the tax would increase the levelised tariff and cost of setting up and operations of grid-connected solar PV by between 12-16%, meanwhile it would increase costs for off-grid solar by 16-20%.
In January this year MNRE joint secretary Tarun Kapoor confirmed that his ministry had put in a request with the Department of Revenue for renewable energy to be exempted from some effects of the GST, should it be passed in parliament.
At the time Kapoor said: “In the GST there is a provision for some items to be exempted, so we have asked for renewable energy to be in the exempted list.”
The MNRE report explained the reason for the implementation of the GST: “Multiple indirect taxes are currently levied on transactions in India. Some of the taxes are levied and collected by the central government, while other taxes are collected by the state governments. Accordingly, the current indirect tax regime is beset by myriad problems such as complexity, tax on tax and lack of credit fungibility.”
Fungibility refers to the interchangeability of a good or asset with other individual goods or assets of the same type.
All existing indirect taxes, except a select few, will be subsumed into the new GST, once it goes through. However, taxes on consumption or sale of electricity have been proposed to be kept outside GST. In such a case, the electricity generated by renewable sources would continue to be outside the GST regime, however this exemption has not been confirmed.
On the other hand, taxes on various capital goods, inputs and services, whether part of the capital cost or operation and maintenance costs, used for generation of renewable energy, are set to be incorporated in the GST regime.
As a result, MNRE said: “It appears that taxes on procurements for renewable energy sector would go up, which would lead to increase in cost of renewable energy (resulting in negative impact for the sector).”
Various concessions on machinery used by the solar sector and other solar components may also be affected
The GST would not only affect solar. The report forecast the impact on other renewable technologies:
The MNRE report assessed the impact of GST on various renewable technologies. Credit: MNRE
The report cited three key factors resulting in adverse impacts on the cost of renewable energy:
- Renewable energy currently benefits from various exemptions to capital goods and inputs, but the GST is based on pruning exemptions as far as possible. Any trimming of these exemptions would raise renewables costs
- GST aims to provide a single rate of tax for goods and services not exceeding 20%. However 20% is substantially higher than rates currently applicable on procurement of goods and services in the renewable energy sector
- Under GST, a concessional rate of tax for inter-state purchases may no longer be available for renewable energy producers.
The call for comments comes in the same week that finance minister Arun Jaitley announced the India Budget 2016, which appears to offer only modest benefits to the solar industry, if any.