While the passing of the Goods and Services Tax (GST) bill has been hailed as a giant step forward in tax reforms, renewable energy developers are deeply worried about its implications. Although taxes on generation and sale of electricity have been kept outside the purview of the GST regime, capital goods and services used for setting up renewable energy projects have been included.Currently, such goods and services enjoy numerous tax concessions and exemptions, both at the Central level and in specific states, which want to encourage renewable energy use. All these are likely to end once GST is implemented, since one of the avowed purposes of GST is to do away with exemptions and concessions.
Around 95% the of solar equipment used in the country, for instance, is imported. While imports generally attract basic customs duty (BCD) of 7-10%, renewable energy-related components pay a concessional 5%. There is also a special additional duty of customs (SAD) of 4%, which for renewable energy equipment is later refunded.In contrast to solar, most wind turbine generators are manufactured locally. Domestically, manufactured goods pay a peak excise duty of 12.5% but, according to a December 2012 order, “goods used for the manufacture of rotor blades and intermediates, parts and sub-parts of rotor blades for wind operated electricity generators” have to pay nothing at all.
These, and other concessions on value-added tax (Rajasthan exempts renewable energy equipment sale from VAT), central sales tax and state entry tax are all likely to disappear once the GST regime kicks in. With manufacturing costs rising, renewable energy tariffs are also likely to rise. The sharp fall in solar energy tariffs, for instance, during 2015 will not only be arrested, but reversed.
In a note prepared earlier this year, the ministry of new and renewable energy estimated that with the implementation of GST, the cost of setting up grid connected solar plants would rise by 12-16% and that of off grid solar plants by 16-20%. It said building wind farms would cost 11-15% more, while wind-solar hybrids (which the country has barely begun trying out) would need 11-17% more investment. Small hydro project costs could increase by 1-11%, while that of bio mass projects by 11-14%.
“The only way cost escalation can be avoided is if renewable energy equipment is listed among the exemptions that will continue under GST or if it is characterized as ‘deemed export’, under which taxes paid can be refunded to the developer,” said Tarun Kapoor, joint secretary, ministry of new and renewable energy. He expected another 10,000-15,000 MW of solar energy projects to be auctioned or tendered out by April 2017, when the GST regime is scheduled to start. “Those bidding should take every ..
Some alarmed solar developers have suggested that all auctions and tendering of future solar projects (by NTPCBSE 0.66 %, SECI and various state governments) should be stalled until there is complete clarity on just how much solar manufacturing costs will rise.
“It makes sense if auctions don’t happen for some time, say for the next six months,” said Sumant Sinha, chairman of leading wind and solar developer ReNew Power. “But I doubt they will stop. There will always be developers who will take a risk and bid. All we want is clarity on how GST will affect us and quick upward revision of tariffs by the state regulatory commissions. If the capex is going to be higher, we must be compensated for it. Discoms will have to agree.”