The power ministry is proposing renewable energy status to supplies meant for large hydropower projects to help keep power tariffs low under the proposed goods and services tax.
The ministry, which has sought zero rating or deemed export status for solar power projects on the grounds that levy of GST will substantially increase tariffs, now wants the same to be extended to supplies for under-construction hydropower projects. These supplies are currently exempt from excise duty or enjoy concessional value-added tax of 0-5% and a central sales tax at 2%.
“Power tariffs will go up substantially if zero rating or deemed export status is not given…It would impact ‘make in India’ and the country’s manufacturing competitiveness,” said a government official privy to the deliberations on the issue.
“It would also be difficult to pass it on to domestic consumers and farmers.” According to the official, the ministry has given a detailed presentation before the GST Council, the apex decision making body for the new tax, to drive home its point about the need for such a special status.
The council will take a call on the matter after the committee of officials on rates for individual items submits its report. About 11,000 MW of hydro power capacity is expected to be added over the next five years and a GST rate of 18% would inflate capex by 10-12%.
“A rate of 18% would lead to substantial increase in capex and it will have to be passed in tariffs,” the official said. Solar would see an increase of 40-50 paisa per unit and wind 30-40 paisa per unit. A panel headed by Chief Economic Adviser Arvind Subramanian on GST rates had suggested bringing the power sector under GST.
“Bringing electricity and petroleum within the scope of the GST could make Indian manufacturing more competitive,” it had said in a report. Experts say carve outs or exemptions for sectors would prevent bringing down the overall tax rate.
“Electricity is kept out of GST purview so now it would be imperative to keep its inputs tax-free to keep cost of powerlow….But, carve outs always create inefficiencies in tax structure,” said Bipin Sapra, partner EY.
The move may have merit, but the fact also is that large hydropower projects have significant carbon emissions. It may be possible to, say, proactively boost carbon sinks, read forest cover, in areas adjoining reservoirs, so as to stem emission. But these can only be on a case-bycase basis, although guidelines and norms for the purpose need to be put in place. A conditional zero-rating maybe warranted provided that green norms are met.