GST IMPACT ON SOLAR POWER PROJECTS
Authored by Mr. Nand Kishore, Partner and Ms. Anshul Verma, Senior Associate – Taxation team at HSA Advocates
1. Overview of GST1. Overview of GST:
The proposed Goods and Service Tax (GST) is a destination based indirect tax that will be levied on supply of goods and services. GST would subsume various indirect taxes currently levied by the Central and the State Government including excise duty, service tax, value added tax (VAT), central sales tax (CST), purchase tax, octroi, entry tax etc.
To facilitate introduction of the GST law, the Constitution of India has been amended vide the Constitution (One Hundred and First Amendment) Act, 2016.
The proposed GST structure is two-tiered, whereby tax would be levied by both, Centre and State Governments. For intra-State (within the State) supply of goods or services viz., the Central Goods and Service Tax (CGST) and State Goods and Service Tax (SGST), would be levied by the respective Governments, respectively. Credit of the above taxes would be available throughout the entire supply chain and the ultimate burden on payment of tax would be borne by the customer. For inter-State transactions (from one State to another), Inter-State Goods and Service Tax (IGST) would be levied by the Central Government.
Clearly, the implementation of GST would result in abolition of multiple taxes and would bring much needed uniformity and certainty in tax rates. GST would also ensure that tax at each stage is creditable, thereby avoiding double taxation. Also, under the GST manufacturers need to comply with only three laws, which are Central law for CGST and IGST and State law for SGST, thereby reducing the complexity involved in compliance with multiple legislations.
2. Tax on electricity:
2.1. Current scenario
Currently, electricity duty is levied on sale and consumption of electricity. However, various taxes on inputs (including goods and services) such as VAT, service tax, excise duty etc., which are used for setting up of a solar power plant, are a cost to the project as they cannot be utilized for setting off against the electricity duty.
2.2. Scenario under the proposed GST regime
The Constitution Amendment Act, 2016, for introduction of GST does not include electricity duty as part of the GST. In this context, reference is made to the “Report of the Select Committee on the Constitution (One Hundred Twenty Second Amendment) Bill, 2014” wherein the Stakeholders had made recommendations to the upper house of the parliament i.e. Rajya Sabha, to subsume electricity duty under GST which will reduce the cost of electricity significantly. The Stakeholders had suggested that electricity duty may not be fully replaced by GST and only a part of the electricity duty may be subsumed to allow the set-off of input GST against the output tax paid on electricity and the States may be granted flexibility to levy a supplementary tax on electricity, in addition to GST, if required. However, the Rajya Sabha rejected the representations made by the Stakeholders.
Thus, even after the introduction of GST, the position for claiming set off of taxes paid on inputs against electricity duty remains unchanged.
3. Taxes on equipment and services for solar power projects:
3.1. Current Scenario
Currently, excise duty on manufacture of all items of machinery, including prime movers, instruments, apparatus and appliances, control gear and transmission equipment and auxiliary equipment (including those required for testing and quality control) and components required for initial setting up of a solar power generation or solar energy production project or facility viz solar modules, solar panels, cables, inverter etc., are at Nil rate.
Similarly, these items also enjoy a concessional Basic Customs Duty of five per cent), Nil Countervailing duty in lieu of excise duty and Nil Additional Customs Duty in lieu of VAT on import. The imposition of VAT on solar power generating equipment has been diverse with some states offering complete exemption such as Rajasthan, Maharashtra, Chhattisgarh etc. and on the other hand some States have levied a concessional rate of tax at 5% (five per cent) on the equipment and components used for setting up of a solar power generating equipment.
There is no exemption on services used for setting up of a solar power plant, however, except the services provided by way of transmission and distribution of electricity.
Works contract services provided by EPC Contractors attracts both service tax and VAT. Value of services in a works contract is deemed to be 40% (forty per cent) of the consideration charged for the works contract. Thus, the effective rate of service tax works out to 6% (six per cent) of the consideration.
Also, works contract is subject to VAT in respect of goods supplied in the execution of the contract. Value of the goods is either determined on actual basis or on deemed deduction basis. Typically, in a works contract, the value of goods is determined on deemed deduction of services at prescribed rates.
The standard deduction rate is usually 25% (twenty five percent) to 30% (thirty per cent) of the contract value. Thus, VAT is payable on 70% (seventy per cent) to 75% (seventy-five per cent) of the consideration of works contract.
It may be noted that the above method results in overlap of taxes, especially when service tax is payable on goods portion of the works contract, resulting in a cascading effect increasing the overall tax cost of the project. 3.2. Scenario under proposed GST regime
The GST rate on solar power generating systems and raw material used (including modules), has been notified at 5% (five per cent) of value of such goods. However, other goods such as inverter, cement and cables have been kept under the 18% (eighteen per cent) bracket. Further, the GST on various services such as works contract service, technology etc. which are typically used in setting up of a solar power plant has been kept at 18% (eighteen per cent).
Under GST, works contracts have been granted the status of services, therefore, the issue of double taxation i.e. VAT and service tax on the same contract value has been resolved. However, there is a significant increase in the rate of tax on services and some other components used in the setting up of a solar power plant, at 18% (eighteen per cent).
This could lead to an increase in the overall cost for setting up of a solar power generating plant by 5% to 6%. Moreover, this would also lead to increased tariff rate as the project owners will not be able to avail credit of such tax paid in setting up of the solar power project.
Consequently, the construction component in the cost of the setting up of a power plant would see an increase in cost owing to the increased rate of tax on goods and services resulting in a negative impact on the sector.