The biggest surprise for the power and renewable sector is the announcement of 18 percent tax rate under India’s new tax regime, for solar modules as compared to the current effective rate of zero.
In contrast, the GST rate for coal has been lowered to 5 percent as against the current rate of 11.69 percent and most other renewable projects and equipment including wind mills, waste to energy plants, tidal energy plants and bio-gas plants and even solar power based devices or generating systems have been classified under the 5 percent rate bracket.
After the Indian government released the final Goods and Services Tax (GST) rates under the new indirect tax regime, last week, the GST Council fixed tax rates on 1,211 items.
READ MORE: Full list of GST rates for 98 categories of goods
Market research firm Bridge to India reports that as of today, most states levy a 5 percent value added tax (VAT) on solar modules. However, in practice, the actual tax rate levied is zero because of a waiver on import duty and VAT in many states.
Effective tax rate on solar inverter imports will also go up from 5.15 percent to 18 percent. The new regime will, therefore, result in an increase of 18 percent in module cost, about 12 percent in inverter cost and 3 percent in all service costs – increasing overall project cost by about 12 percent, BTI says.
“Importantly, we do not believe that the new rate structure will give any advantage to domestic manufacturing as cost of import of raw material, including cells and wafers, will go up in the same proportion,” says Vinay Rustagi, MD, BTI.
It was widely expected that solar modules would be classified under zero or 5 percent bracket to continue growth momentum in the sector. However, sharp reduction in equipment costs and solar tariffs seems to have convinced the government that the sector doesn’t need any more financial incentives.
“We don’t need support of lower taxes to encourage renewable energy. By itself, it is good for the nation. It reduces pollution. It give discoms 25-year long affordable power at prices which are even below grid (parity price),” renewables minister Piyush Goyal told reporters when asked if the new Goods and Services Tax rates would impact clean energy in India.
“But we believe that this process will be complex and challenging. First, there are multiple templates for power purchase agreements (PPAs) in the country with huge variation in change in law provisions. Second, the discoms will obviously resist any tariff increase particularly when tariffs for new auctions are reaching all-time lows. Third, the entire process for tariff determination, ratification and documentation amendments would easily take up to 6 months or even more,” Rustagi says.
“Meanwhile, developers will be under pressure to complete projects on time and lenders will be unwilling to fund extra costs. It wouldn’t be surprising if this process leads to cancellation of some projects altogether,” he adds.
Recently, Solar Energy Corporation of India’s (SECI) 750 MW utility scale auction in Bhadla solar park saw tariffs fall to a new astounding low of Rs 2.44 (US¢ 3.79)/ kWh.
A key obvious contributor to falling tariffs is a sharp reduction in module prices, down almost 30 percent in the last one year.
“Nonetheless, more than 10 GW of ongoing utility scale projects would be hit badly by the new rates,” BTI says.
Rustagi believes that the long-term prospects of the industry would not be impacted by GST provisions as an increase in tax rates will be quickly offset by falling costs.
“A commercially viable, non-subsidy dependent sector is naturally more sustainable in the long run. However, we do wonder why solar equipment is attracting higher taxes than coal or other power equipment,” he opines.