The proposed Goods and Services Tax is worrisome for India’s solar energy developers if exemptions are lifted and levies raised, but manufacturing may flourish as cascading taxes would be eliminated
Solar power tariffs in India, which sunk to a record low of INR 2.97 (USD 0.04) per KWh for a newly auctioned project in Madhya Pradesh, could see upward pressure of as much as 10% if tax incentives are squeezed when the Good and Services Tax (GST) is introduced later this year, a new study has indicated.
The new tax regime may also slacken the pace of the second phase of solar park development to add additional capacity of 20 GW that was announced in the federal budget on February 1, according to the study by the Council on Energy, Environment and Water (CEEW), a New Delhi-based think tank.
GST is India’s most ambitious tax reform that seeks to create a unified national market by consolidating various indirect taxes such as excise duty and value-added tax. The central government wants to start implementing it from July 1 this year, Finance Minister Arun Jaitley said in a recent statement.
Pressure on costs
As a result of the tiered indirect tax system, the solar energy sector is expected to face increased operations and maintenance costs, higher panel prices and, most importantly, financing costs. The capital cost of a solar project could rise by INR 4.5 million per megawatt if current tax exemptions were curtailed, setting back the sector by about 18 months in terms of cost competitiveness, the CEEW study said.
“With the annual solar power capacity addition expected to be more than 12 GW in 2017-18, it is vital that major hurdles for deployment, such as the potential impact of GST on the sector, be ironed out as early as possible,” said Arunabha Ghosh, CEO, CEEW. The government must introduce mechanisms to offset the short-term negative impacts of GST, he added.
“If current tax exemptions are curtailed, the impact of the increase in solar tariffs could be partially offset by policy instruments, such as accelerated depreciation benefits or viability gap funding for projects incurring increased capital investments,” Ghosh said.
CEEW said the increase in solar tariffs would vary across states. It would be higher for states such as Rajasthan where VAT and entry tax exemptions are provided, unlike in Andhra Pradesh and Gujarat.
Make in India boost
However, GST will give a boost to the government’s Make in India initiative by eliminating the cascading effect of the existing tax structure and introducing an input tax credit, thus improving the competitiveness of domestic makers of solar cells, panels and modules. The increased thrust to the solar manufacturing sector could create an additional 37,000 new jobs by 2022, CEEW said.
The latest Union Budget has already benefitted domestic solar manufacturers by reducing basic customs duty to zero for tempered glass used in the making of solar cells, panels and modules. It also reduced the countervailing duty from 12.5% to 6% for parts used in the manufacture of tempered glass, which is used in solar photovoltaic cells and modules.
Solar project developers have approached the government with requests to ensure that the current tax exemptions continue so that efforts to achieve grid parity are not negatively impacted. The government currently collects less than 0.1% of its total indirect tax collection from the solar sector.
Last week, Mahindra Renewables, Solenergi Power and Acme Solar Holdings won contracts to build 250 MW units each in a mega solar park in Rewa, Madhya Pradesh, where tariffs breached the INR 3 KWh for the first time. The 750 MW Rewa project will supply electricity to the Delhi Metro network, and the low tariffs may well lead to lower ticket prices.