Solar becomes the milch cow

26 September 2021 |

The GST Council, an inter-governmental decision-making body headed by India’s Finance Minister, has recommended an increase in levy of GST (Goods and Services Tax) on all renewable energy “devices and parts” from 5% to 12%. The increase is expected to be ratified by the Union Cabinet shortly and become applicable from 1 October 2021. It is part of various changes proposed by the GST Council in an attempt to rationalise rate structure and bolster revenues.

  • The proposed revision would increase solar project capital cost by 4.5% and power tariffs by about 4%;
  • The decision runs afoul of push to scale up renewable power capacity amidst a multitude of challenges facing the sector;
  • There is need for continued financial support for the sector until cost of storage technologies falls by another 30-50%;

The concessional rate of 5% for renewable energy products was introduced in 2018 to support the sector. The proposed 12% rate is still lower than the normal 18% rate applicable on most items of daily use. But it is likely that the 12% and 18% slabs would be merged in near future to further streamline the GST regime at an intermediate rate (say, 15%).

Solar projects are currently subject to a blended GST rate of 8.9% – 5% tax on 70% of project value (notional contribution of goods) and 18% tax on the remaining 30% value. With the proposed revision, the blended rate would go up to 13.8%, effectively increasing capital cost by 4.5%. After the proposed 40% basic customs duty kicks in from April 2022, the combined effective tax and duty rate on solar modules would be an astonishing 72.48%. Meanwhile, industry rumours suggest that an anti-dumping duty could be imposed on solar cells and modules as soon as next month. The Ministry of Commerce has completed its trade investigation and a hearing is scheduled for 5 October 2021.

The argument that renewables are already the cheapest source of power – and more taxes would not dent their competitiveness vis-à-vis other sources – is hollow. Renewables should be compared with other despatchable sources after factoring in all necessary grid balancing and system costs on a like-for-like basis. That analysis still yields an ambiguous result making a strong case for continued financial support for renewable power until cost of storage technologies falls by another 30-50%. Besides, high taxes and duties are no way to support a priority sector with few other options. The decision to hike GST rate runs afoul of push to scale up renewable power capacity amidst all the other challenges facing the sector.

Abrupt tax changes also add to pervading unease in the sector beside creating a cascading set of issues across the value chain. In theory, utility scale projects are protected by ‘Change in Law’ provisions but the compensation process is arduous and not sufficiently restitutive. DISCOMs would get even more reluctant to purchase renewable power. It is worth noting that several compensation disputes pertaining to the original 5% GST levy in 2018 are still ongoing. Distributed renewable market – both rooftop solar and open access – would be hit harder as vendors renegotiate contracts and consumers assess implications for project viability.

There is no doubt that COVID has caused tremendous strain on government finances and there are more pressing priorities relating to healthcare, food and jobs. Indeed, the central government is having to borrow money to offer compensation to states for GST shortfall. Unfortunately, GST hike on renewable equipment, worth incremental annual revenue of only about INR 20 billion (USD 270 million, less than 0.1% of total tax revenue), is unlikely to solve that problem.

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