India’s new tax regime proposes to raise the cost of photovoltaic panels and modules by as much as 18% but it is expected to have a small effect on the growth trajectory of the solar energy sector

Higher taxes are likely to have minimal effect on the country's solar growth engine. (Photo by Reliance Power)

Higher taxes are likely to have minimal effect on the country’s solar growth engine. (Photo by Reliance Power)

The government of India’s surprise announcement that solar photovoltaic cells and modules will attract a levy of 18% under the new tax regime that comes into force on July 1 has caught the industry unawares, but industry experts said that it was unlikely to have any lasting impact on the rapid growth of the solar energy sector in the country.

India’s ambitious Goods and Services Tax (GST) regime, which does away with provincial levies such as excise and value-added taxes, will unify the entire country into a common market. The government has proposed four slabs of taxes under the new system. According to a list of 1,211 items released last week after the meeting of the GST Council, which comprises finance ministers of all the states of the union, “Photosensitive semiconductor devices; including photo voltaic cells, whether or not assembled in modules or made up into panels,” will be charged at a rate of 18%. The current effective rate for solar panels and modules currently stands at zero.

However, the council has proposed that renewable energy devices, which includes waste-to-energy and biogas plants, solar water heaters, solar lanterns and lamps, solar power generating systems and windmills, be charged at the lowest tax slab of 5%. The low 5% tax on wind turbines is expected to keep project costs low for developers such as Inox Wind and Suzlon Energy, and soothe worries of the wind energy sector. Some battery types and components may get the highest tax of 28%. See: Wind power industry seeks extended incentives

The rates are not yet final. The proposals are subject to further vetting and the list may undergo some changes. They will be finalised by the end of June.

Solar is strong enough

The government has strongly defended the high rate of tax for solar panels and modules. “Tariffs for solar projects vary from project to project. The rise (in tax rate) will be compensated by the decline in corruption and operational difficulties,” energy minister Piyush Goyal said at a media briefing after the list was made public. “The prices of solar and wind energy have hit a record low and the industry is now able to stand on its own feet.”

But the new rates will hit more than 10 GW of utility scale solar power projects and could pose a threat to their viability, according to Bridge to India. They will result in an increase of 18% in the cost of solar modules, about 12% in inverter cost, and 3% in all service costs, thus increasing overall project cost by about 12%, the clean energy consultancy said.

“There was widespread expectation that solar modules would be classified under zero or 5% bracket to continue growth momentum in the sector,” Bridge to India said. “However, sharp reduction in equipment costs and solar tariffs seems to have convinced the government that the sector doesn’t need any more financial incentives.”

Unprecedented growth

India’s solar energy sector is in the middle of unprecedented growth, fed by declining tariffs, improved technology and a global oversupply of photovoltaic panels and other material, mainly in China. “India is on track to install more than 10 GW of renewables per year from 2017 as large-scale renewables, rooftop solar and off-grid sectors show impressive growth,” Bloomberg New Energy Finance said in November in a report titled Financing India’s Clean Energy TransitionSeeIndia’s solar dream rests on Chinese imports

Low tax for windmills should make developers happy. (Photo by Danish Wind Industry Association)

Low tax for windmills should make developers happy. (Photo by Danish Wind Industry Association)

The increase in tax rates for solar panels is not wholly unexpected. Solar power tariffs in India, which sunk to a record low of INR 2.944 (USD 0.03) per KWh for a newly auctioned project in the Thar desert in Rajasthan, could see upward pressure of as much as 10% if tax incentives are squeezed when the GST is introduced, India Climate Dialogue had reported in February this year, based on a report by the Council on Energy, Environment and Water (CEEW), a New Delhi-based think tank. CEEW had predicted that the GST could add around 10% to the cost per kWh of production in India if the current incentives are withdrawn. See: New tax regime may push up solar tariffs

Standing on it own

“India’s solar industry can stand its ground with 18% GST rate,” Jasmeet Khurana, Associate Director at cleantech consultancy Bridge to India, said in a post on microblogging site Twitter.

The pace of solar tenders accelerated sharply after the government announced an ambitious target of adding 100 GW of solar capacity addition by 2022. Currently, the cumulative installed capacity in India is above 12 GW, and the solar sector is expected to add around 10-12 GW of new capacity in 2017.

India’s wind power sector seems to have shifted into a higher gear as well, aiming to build wind farms and installations to add at least 6 GW of capacity every year for the next five years. The country’s first ever wind power auction in February saw a record low tariff of INR 3.46 per kWh. SeeStrong tailwind powers bids for new wind farms

“We don’t need support of lower taxes to encourage renewable energy,” energy minister Goyal said. “By itself, it is good for the nation. It reduces pollution. It gives discoms 25-year-long affordable power at prices which are even below grid (parity price).”

The recent bids of supplying renewable power at the wholesale rate of below Rs 2.50 per kWh at various solar and windpower parks put the cost of energy from sunlight and wind below that of grid-connected, coal-fired power plants, which averages at around Rs 2.60 per kWh. India’s energy sector has taken a decisive turn towards solar and wind power. The appetite of private developers to secure large, grid-connected solar and wind power projects shows no signs of slowing down. See: Renewables drive creative destruction of energy landscape

“We believe that the long-term prospects of the (solar) industry would not be impacted by the GST move as an increase in tax rates will be quickly offset by falling costs,” Bridge to India said. “A commercially viable, non-subsidy dependent sector is naturally more sustainable in the long run.”

 

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