The GST regime might help most manufacturing sectors, but will inflate the electricity costs by up to 8% as the government has decided to keep electricity out of the ambit of new tax dispensation. Power companies would have to pay GST for their inputs such as fuel and machinery, but won’t be able to get these taxes refunded given that their output — electricity — is exempt. This higher cost of producing electricity will then be passed on to the consumers under the ‘change in law’ clause in the power purchase agreements. The burden would be higher for renewable firms as capital costs – investments in equipment – form the bulk of their operational expenses with labour being a tiny factor.
“GST is probably the biggest reform India has witnessed. Implementation of this reform is likely to augment 1.5% to GDP of the country. However, it may not be good news for the renewable sector, as it is likely to increase the cost of renewable business and impact tariffs by 30-40 paise,” Sunil Jain, CEO, Hero Future Energies, said.Currently, inputs for electricity generation are subject to excise/VAT levies, (at concessional rates in some cases) but corporate groups are largely able to offset the input tax costs against tax liabilities on outputs other than power and indeed in case of captive power, an input by definition. “Business will need to provide for a higher amount of working capital unless the tax refund/cenvat under the new regime is quick and simple. While the overall structure is definitely expected to provide an impetus to business, from the industry and trade standpoint, there are still a number of issues that need to be addressed,” Ratul Puri, chairman and managing director, Hindustan Powerprojects said.
Renewable firms are faced with a peculiar situation with regards to GST. While any impact caused by the new tax structure would be allowed to be passed through by law, the developers are unsure about the mechanism that the state regulators would follow for the same. This has put the companies in the bind when it comes to pricing their bids for the upcoming tariff-based competitive bidding.