A common Goods and Services Tax across India is supported by almost everybody when in government, but solar entrepreneurs fear it will raise costs by up to 20%, not just for new projects, but also for ongoing ones

A new taxation proposal can increase the cost of grid-connected solar energy generation by 12 to 16% and that of off-grid systems projects by 16 to 20% in India. (Image by Kevin T. Houle)

A new taxation proposal may increase the cost of grid-connected solar energy generation by 12 to 16% and that of off-grid systems by 16 to 20% in India. (Image by Kevin T. Houle)

On March 11, Union Finance Minister Arun Jaitley said in the Lok Sabha that he hoped to see the Goods and Service Tax (GST) bill being passed in the ongoing Budget session when Parliament reconvenes on April 25. He is hoping for support from government and opposition MPs alike.

However, a recent study by the Ministry of New and Renewable Energy (MNRE) concludes that on account of this new indirect taxation proposal, the cost of grid-connected solar energy generation projects may rise by 12 to 16% and that of off-grid systems by 16 to 20%.

The report estimates that the cost for all equipment used in a solar project, such as solar modules, inverters, cables, batteries, structures and others will go up, adding 12-20% to current costs.

The cost will increase due to two reasons. First, there will be a GST of 17-20% on solar modules, compared to zero import duty or any other indirect tax now. Second, there will be another GST of 17-20% replacing current local imposts such as value added tax (VAT), excise duty, entry tax and octroi. Currently, these total around 5%.

Renewable energy (RE) analysts say that although successful passage of the current GST Bill will be highly beneficial to the wider economy, there is this devil in the details. This can become a crucial obstacle as India strives to reach its ambitious goal of generating 100 GW of solar energy by 2022.

Jasmeet Khurana, Associate Director Consulting of the RE consultancy firm Bridge to India, told indiaclimatedialogue.net, “The renewable sector, currently a beneficiary of several indirect tax exemptions, may be a big loser as a result of GST since the bill proposes to revoke most of the exemptions.”

Solar energy generation costs have been falling steadily for the last few years, as reflected in the bidding for solar projects in various parts of India. That may stop, and the costs may even go up, analysts caution.

As the Indian market is predominantly focused on utility-scale solar projects, the impact of a high GST rate will be highest there. “We fear that a standard GST rate has not been considered for projects that have bid at such aggressive tariffs,” Khurana said. “For all projects where the procurement has not been completed by the time GST is implemented, economic viability will surely come under question if standard GST rates are made applicable on solar equipment. The new tariffs being quoted will also go up.”

Sunil Jain, CEO and Executive Director of Hero Future Energies, says service tax is also likely to increase to 18%, leading to around 5% rise in operations and maintenance charges. That will translate to an 8-9% rise in project costs, finally impacting tariff.

Vineet Mittal, Managing Director of Welspun, thinks enactment of GST in its present form “will result in a 20% increase in cost of setting up RE projects”.

Ritesh Pothan, Managing Director of Natural Group — another RE consultancy — is hoping that this sector will get some tax breaks after all. “It may not happen immediately, but the glamour of the industry will ensure it happens. Otherwise, government targets will be severely affected.” He also thinks “quality will suffer tremendously”.

Tulsi Tanti, Chairman and Managing Director of RE major Suzlon, said, “GST for renewable energy should be pegged at zero rate, since electricity is not subsumed under the proposed GST framework.”

Industry seeks zero tax category

Jain of Hero Future Energies suggests that solar and wind projects be shifted from exempt to zero tax category. Service tax will still have an impact, and there will be questions on the viability of new projects.

“Having said that, GST rollout will not impact the rollout of solar projects, but a resultant effect can be an upward trend in solar tariffs,” Jain said. “However, a further fall in panel prices is likely to nullify some of the impact of GST.”

The GST bill does have an exemption list of around 100 items. The RE industry is hoping that solar cells and modules will be added.

Various RE industry groups have started lobbying for this. Reportedly, so far they have approached the MNRE but not the finance ministry. On its part, the MNRE is believed to be pushing for a waiver.

Speaking on the condition of anonymity, MNRE officials told indiaclimatedialogue.net that they conducted a study because they were concerned the introduction of GST would have an adverse impact on the RE sector. “RE should not become costlier than it is now. In case that happens, MNRE will take it up with the concerned organization to nullify the GST impact,” an official said.

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