GST is undoubtedly one of the bold reformations that promised to change Indian economic landscape for good. It has led to standardization of indirect tax laws, thus making them business friendly and intelligible for investors. Cascading of taxation was also removed by GST, which was the biggest problem with previous tax regime. All this significantly leads to ease of doing business in India.
However, aside from offering benefits, has also presented some challenges for nascent solar industry of India. Indian solar industry made incredible strides in recent years reaching 21 GW installed solar capacity in 2018 Q1 from a meagre 10 MW in 2010. New projects are being introduced, and investor interest in Indian solar sector is growing. In this scenario, policy reformations could have opened up even bigger opportunities for growing solar industry, leading India out of energy scarcity.
Let Us Look At The Privileges Indian Solar Sector Enjoyed Before GST:
Excise Duty: The Excise Duty on Manufacturing of Solar Modules (HS Code 854140) is Nil vide exemption notification no. 12/2012 dated March 17, 2012
Sales Tax: The Sales Tax in the form of VAT/CST has been Zero Rated/NIL/Exempted in most of the states namely Rajasthan, Madhya Pradesh, Uttar Pradesh, West Bengal, Karnataka, Tamil Nadu, Chhattisgarh etc.
Basic Custom Duty: The Basic Custom Duty on import of Solar Modules (HS Code 854140) is Nil vide exemption notification no. 24/2005 dated March 1, 2015
Total Custom Duty: The custom duty on import of Solar Modules is Nil, since Basic Custom Duty is Nil and CVD (in lieu of Excise Duty) is Nil so, SAD (in lieu of VAT) is Nil.
Post Implementation of GST
At the beginning, we need to highlight that, taxation of electricity has not been subsumed under GST (entry 53 of List II of Seventh Schedule of the Constitution of India), and even sale of goods has been subsumed as part of GST. GST on electrical energy is Nil (entry 54 of List II of Seventh Schedule of the Constitution). Also, distribution of electricity is exempted from GST imposition. Although, these policies may appear as GST has given energy industry a reprieve, in some cases GST has presented some hurdles to solar growth.
Government has imposed GST on various inputs and capital goods that are used for generation of renewable energy. Therefore, it is apparent that the taxes paid on procuring inputs for solar development would be non-creditable for the project owner. And, even the slightest increase in the indirect tax acquired to set up of solar plants would be incremental cost. This can affect the profitability of distribution/power generation companies negatively.
Currently, solar plants, solar power based devices, solar lantern/solar lamp attract 5% GST rate. However, the 5% GST rate is only selected for a handful of specific devices (as explained), while the long list of inputs like- cables, battery, module mounting structures, inverter, transformers etc that are required in development of a solar plant are taxed at 12/ 18%.
Additionally, the service tax rate, which was 15% prior to GST implementation, now attracts 18% tax, making important services like- erection, installation, operation and maintenance of a solar plant expensive. It is important to understand that although solar panels are the centre of the solar plant technology, other inputs are also integral in turning the plant operational. Therefore, putting services, goods required for solar installation in 5% GST bracket is the best way of ensuring solar growth.
Additionally, by categorizing solar plant installation as a work contract Government has imposed 18% GST on project development without entertaining any exceptions for green energy generation projects. This makes imposition of low GST rates on solar devices (handful of them) ineffective, since the overall cost (for project development) of 18% would have to be paid by the project owner.
Rising Project Cost May Lead to Lower Growth
GST imposition has increased the total project cost up to 12-14%. In this scenario when Indian solar industry is growing, indirect tax incidence on solar projects are making the projects unviable. All India Solar Industries Association (AISIA) has appealed to the Government to classify Solar power projects in as composite supply with solar power generating system as principal supply.
However, no relaxation or clarification has been announced to support the industry. Additionally, there are concerns regarding lack of clarity on GST rate on contractor’s billing, and repayment of working capital that has been blocked due to high GST rates on procurements. These issues are bringing new challenges for growing solar industry and making investors, developers hesitant to opt for solar project development.
In view of these developments, putting solar equipment in a single (5%) tax bracket and provide clarity on GST rates to remove the confusion in the sector, would really help the industry. GST can serve as an effective tool to support solar and lead India towards economical reformation through simplifying the taxation and investment opportunities. However, for that to happen, priorities have to be set and actions have to be taken to protect India’s most lucrative opportunity (solar) for growth.
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