India recently passed the Constitutional Amendment Bill 2014, also known as the GST (Goods and Services Tax) Bill. The 122nd amendment to the Indian Constitution is the first step that the country is taking towards simplifying the taxation regimen. The GST, once implemented, will be India’s biggest structural reform, simplifying imposition of indirect taxes in the country. Predictably, the passage is now facing heat from both the left and the right sides of the spectrum. While the former talks of its inflationary pressure, the latter is talking of the rates being too high to have a tangible economic impact. Studies indicate that the direct benefit of implementing GST could be as high as $15 billion.
Need for consultation
While the GST will have a positive and net accretive impact on the Indian economy, there is a definite need to balance the government’s priorities in the short term and the long term. At a time when India is committed to reducing its dependence on fossil fuels by increasing the share of renewable energy capacity in its total power generation, the introduction of GST has the potential to set the industry back.The sector currently enjoys various fiscal incentives, including 100% tax holiday on earnings for 10 years, and concessional excise and custom duties for several key components. The implementation of GST will bring with it a tax liability of around 18% and increase the cost for new projects by as much as 20%. The impact is going to be particularly significant in case of solar at a time when solar is going to be the mainstay of India’s ambitious 175 gigawatt (GW) target by 2022.
In solar projects, the biggest expenditure is the costs of panels, which are mostly imported. The GST implementation is likely to increase tax on such panels and is likely to arrest the fall in per unit price of power that has been achieved till now. As per a report released by the ministry of new and renewable energy, the promulgation of the law can result in an overall increase in tariff by 12-15% in case of solar and 12-14% in case of wind, depending upon the state where the project is located.
In the current scenario, developers are unaware of the various uncertainties in the post-GST period, especially in case of projects that have been tendered and won under the old tax regime. A round of consultation will help power generation companies arrive at clarity on the fate of the power purchase agreements (PPAs), which were executed in the old tax regime but will be implemented in the new tax regime. But the problem is—while costs, internal rate of return (IRR) and tariff have been calculated taking into account the current tax structure, the implementation under the new regimen will lead to additional taxes on projects. In case of projects where the bid process has been concluded but PPAs are yet to be signed, even the ‘change in law’ protection under the PPA is not afforded to developers. Therefore, such consultation will also help developers understand the new regime and take into account appropriate mitigation measures in all upcoming bids.
Finding a middle ground
Policy decisions in any economy need to be made with the governance principle of ‘greatest good for the greatest number of people’. While one agrees that the GST legislation has its benefits, the long-term impact on renewables also needs to be kept in the policymakers’ set of considerations. Since the GST bill does have an exemption list of around 100 items, the government can accentuate its policy push towards renewables by including solar panels, solar cells and modules in that list. Alternatively, categorising renewable power as ‘zero rated’—the provision for which exists in the draft GST law—and allowing renewable power generating companies to claim refund of input taxes will also reduce the looming threat of large taxation on the renewable sector.
India as a nation aspires to have 100GW of solar and 60GW of wind energy capacity by 2022. An ambition that guarantees better and cleaner air to our future generations along with a stable economy that is immune from oil price fluctuations. Therefore, it is imperative that a structural reform such as GST is implemented with an eye on the future and due consultation with the stakeholders who are working to achieve that ambition.