How will an increase in the GST impact solar energy tariffs and the overall renewable energy sector?, Energy News, ET EnergyWorld

New Delhi: The government has recently insisted on the need to expand India’s global presence in the renewable energy sector. If we talk about solar power, at present India has a domestic manufacturing capacity of only 3 GW for solar cells and 15 GW for solar modules. With many measures taken by the government to boost domestic manufacturing in the solar sector, India is looking to play a bigger role in global supply chains. With programs such as the Rs 4,500 crore PLI program for solar PV modules, India is expected to increase its local manufacturing capacity. The government has announced installation targets of 175 GW of renewable energy by 2022 and 450 GW by 2030 and is expected to add a capacity of 10 GW of integrated solar photovoltaic (PV) panel manufacturing plants and bring a direct investment of around Rs 17,200 crore.

In addition, India’s decision to impose 40 percent basic tariffs on solar modules and 25 percent on solar cells from April 1, 2022 can also be seen as a measure making imports more expensive and favoring domestic manufacture, all in accordance with the Aatmanirbhar Bharat.

However, in line with the recommendation of the GST Council at its 45th meeting on September 17, 2021, the government has increased the tax rate on solar components from 5% to 12%, which has worrying effects on many developers. of projects, including EPC contractors with considering its impact on project costs. With regard to the Notification, renewable energy devices and their parts such as solar energy-based devices, solar power generators, wind turbines, wind power generators (WOEG), etc., whether or not they are assembled in modules or made up of panels, will attract 12 percent GST from 5 percent. This increased the total taxation on a solar project from 8-9 percent to 12-13 percent and will increase further to 30 percent from April 2022, when tariffs of 40 percent on imported solar modules will come into effect.

It is important to note that before the rate change in case of supplying solar power generation systems, 70 percent of the gross contract value was taken into account for the supply of goods, attracting a rate of 5 per cent. cent, which was increased to 12 percent. The remaining 30 percent considered to be related to the supply of taxable services continues to benefit from a GST rate of 18 percent.

Thus, the tariff increase is a significant increase and will undoubtedly have an impact on existing and future projects and could have a negative effect on the growth and development of the renewable energy sector.

Since this is a case of a reverse tariff structure, in which the supply of electricity is not taxable, the GST paid on solar power generation projects is a significant cost, reaching almost $ 4. 9 percent increase. However, instead of allowing the repayment of unused credit on input services and capital goods, this increase in the rate of the GST on supplies of outputs will place an additional burden on consumers. In this regard, it is important to mention that the current issue was discussed within the assembly committee and that following detailed discussion, the committee estimated that the rate of 5% on energy equipment Renewable created a reverse tariff structure for these items because most of their inputs attract 18 percent GST. While an NIL rate on solar power equipment would also have caused a reversal for solar power, it was ultimately decided that closing the gap between inputs and supplies of renewable equipment would help domestic manufacturers. .

Another problem for developers is that the rate change will also create transition issues for ongoing projects. As a result, the AAE tariffs should be increased to take into account the increase in the tax. Therefore, there may also be an increase in rate change requests by all developers under the law change mechanism. However, this option is not preferred by developers due to cumbersome legal process, long lead times and expense resulting from dispute with DISCOM.

In recent months, the solar industry has been hit hard by the rising cost of essential commodities, including steel, aluminum and copper, and now with the increase in the GST rate, Developers who claimed to enjoy a tax holiday before April 2022 see the tax rate changes unsustainable for their operations. In addition, the increased cost of offers may also scare state distribution companies into future offers due to the resulting increase in tariffs.

Multiple decisions and policies have already caused the solar industry to reluctantly realign itself, creating unprecedented uncertainty. A particular emphasis on straightening policies with the ultimate goal of stimulating the growth of this important sector is the need of the hour. Therefore, the government must also aim to standardize tariffs for the solar energy sector and set the tone by clearly indicating that the development plan of the renewable energy sector is its main concern through policies beneficial to manufacturers. national and not just by setting targets. .

[This piece was authored by Smita Singh, Partner–Indirect Tax, Customs & Trade Group at Singh & Associates]