Impact of the proposed Goods and Services Tax in India on the Renewable Energy Sector

In a nutshell: ​

The current Indirect tax regime in India provides for a complex tax environment due to multiplicity of taxes at the Central and State levels resulting in double taxation, compliance obligations under the respective regulations, complexed tax structure and tax cascading.

Given the above, India is gearing up to introduce a comprehensive Indirect tax regime effective 1 April 2017, where all existing Indirect taxes, barring a select few, would be subsumed into the new Goods and Services Tax (GST). GST aims at creating “One Tax One Market” by: 

• Eradicating the cascading effects of taxes by way of subsuming all existing indirect taxes
• Provide seamless flow of input tax credit
• Reduce compliances and administration thereby improving ease of doing business
• Simpler and rational tax structure 

An important step towards implementation of GST was taken when the 122nd Constitutional Amendment Bill was cleared by the Indian Parliament and ratified by more than 16 state assemblies. Now, the said bill has been cleared from the Indian President so that Governing body for GST can be formed and other technicalities such as passing of the GST laws at the Central and States levels can be undertaken. 

Introduction of such a major tax reform is bound to have a significant impact on the Renewable Energy sector in India. Under the present scheme of Indirect taxes, electricity is considered as “goods” and generation of electricity was held to be “manufacture” under various judicial precedents. Given the same, excise duty as well as state VAT was per-se, applicable on generation and sale of electricity respectively. However, given the fact that the State Governments levy a specific duty called “Electricity Duty” which ranges from 6% to 20% from state to state on eventual consumption of electricity by end customers, generation and sale of electricity was exempted under the Excise and VAT laws. 

Further, to promote the Renewable Energy Sector, the Central and State Governments have provided various exemptions/ concessional duty rates under customs and excise laws on equipment, parts used for setting up power generation projects.

However, goods procured by the OEMs still attract such taxes while services required for setting up/ construction are liable to tax under the Service Tax provisions. Given that the end product “electricity” does not attract excise duty/ VAT but Electricity Duty, which is levied under a different state specific statute, the taxes already paid on such goods and services are not allowed as input tax credits and become a cost in the hands of the project developer resulting in an overall increase in the project cost.

Even though “electricity” is considered to be a commodity of special importance entitled to several tax exemptions at various stages of the supply chain, the net tax cost on per unit of electricity consumed in India is as high as 30% as per the 13th Finance Commission Report issued in the year 2009. 

While switching over to GST, the Government had an opportunity to address this anomaly by bringing the entire supply chain including the end product electricity within the ambit of GST. This would have not only resulted in seem less flow of input tax credits in the supply chain right from OEMs and project developers till companies engaged in distribution of electricity, but would have enabled the industrial and commercial users to claim input tax credits of GST paid on electricity consumed for taxable operations. This was also in line with the representations made by some of the Renewable Energy Industry Associations in India with the Government of India. 

However, under the Constitution Amendment Bill passed by the Indian Parliament, while all major taxes such as Excise Duty, VAT/CST and Service Tax are proposed to be subsumed in the GST regime, Entry 53 in List II of Schedule VII of the Constitution which empowers the State Governments to levy “Electricity Duty” has not been omitted.

Further, given that electricity can still qualify as “goods” as held in various judicial precedents, supply of electricity can still be made liable to GST under the proposed GST regime resulting in double taxation. However, it widely expected that GST on electricity would be exempted as electricity duty would be levied by State Governments on consumption of electricity. Therefore, the electricity generated by renewable sources would also continue to be outside the GST regime.

However, taxes on goods, equipments and services (both forming part of capital cost as well as operation & maintenance costs) used for generation of renewable energy would be covered under GST. 

Accordingly, GST paid on procurements would continue to be non-creditable in the hands of the project developer thereby becoming a cost in the supply chain. The Tax cost is expected to be substantially higher under the proposed GST regime due to the following:  

• List of goods entitled for exemption under the present regime would be reduced significantly under GST and therefore, several goods under the Renewable Energy Sector may not be entitled to exemptions under the proposed GST regime.
  
• Concessional 2% CST applicable on interstate purchases against issuance of statutory form would not be available and such purchases would be taxed at peak GST rates. 
• GST rate of 20% as recommended by the Select Committee higher than the rates currently applicable on various goods in the renewable energy sector.
  
• GST rate on services used would also be increased from the existing 15% levels to 20%.  
  

As per a report of New and Renewable Energy Ministry on “Implications of GST on delivered cost of renewable energy”, the cost of setting up and operations of renewable energy projects and consequential impact on the levelized tariffs are expected to increase between 11-20% depending on the source of renewable energy and procurement pattern. Increase in tax cost for renewable energy sector would not only have a possible negative impact on cost of setting-up renewable energy plants but also increase the working capital requirements for the renewable energy sector leading to higher financial as well as operating costs.

The Indian Government has set ambitious targets to grow from just under 43 GW in April 2016 to 175 GW by the year 2022 including 100 GW from solar power, 60 GW from wind power, 10 GW from bio power and 5 GW from small hydro power.  In order to achieve such targets, the Indian Government would have to re-evaluated its strategies under GST for the renewable energy sector and think of bringing the entire supply chain within GST right from OEM to end customer ensuring seem less flow of input tax credits in the supply chain. In case the same cannot be achieved, following additional options could be explored:

• Provide unconditional exemptions under GST on all goods, whether capital or ancillary, and services used for setting up a renewable energy project. In case GST has to be applied, the said goods and services should be “Zero Rated”, which will entitle OEMs and vendors to avail input tax credits on supplies made to such projects. 
• In case such exemptions cannot be provided uniformly, enable a project developer to claim refund of input taxes paid on goods and services used for setting up and operating the renewable energy project.
• Regular revision of fixed power tariff procurement rates after taking into account the increase in the tax costs in the hands of renewable energy companies under GST.