In the short-run, study suggests a 10 per cent increase in solar tariff as a result of increased project capital cost by about INR 4.5 million per MW but in the long run, GST will eradicate presence of inverted duty tax structure in the value chain of solar cells, modules and panels manufacturing and the introduction of Input TaxCredit will eliminate cascading effect of existing tax structure, write Anjali Viswamohanan and Neeraj Kuldeep.

and Service Tax (GST) rates and their applicability on different solar Photovoltaic (PV) system components has raised concerns. The likely increase in project capital cost and solar tariff as a result of the GST are major worries, especially for renewable projects which are currently in the construction or tendering phase.

Uncertainties over the continuation of existing tax benefits for grid connected solar projects, adds to the concerns of developers and investors alike. Under the existing tax regime, solar PV system components in India are largely exempt from import duties and indirect taxes levied by the central and state governments on the manufacturing and supply of goods.

Solar tariffs in India touched a record low of INR 3.3 per kWh last month in the recently awarded 750 MW Rewa Ultra

Mega Solar Park in Madhya Pradesh. This

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is a significant decline from the lowest solar tariff prior to this, of INR 4.34 per kWh for a 420 MW project in Rajasthan. Amidst this favourable direction for the sector uncertainty over multiple Goods

Good & Bad of Goods & Services Tax for Solar Energy

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tax structure, GST has two more categories – goods that lie outside the ambit of the GST and a 0 per cent category for goods that are exempted under GST.

ll IMPACT of THE GST oN THE SolAR SECToRA recent study published by the Council on Energy, Environment and Water (CEEW), “GST: A Good Solar Tax?” highlights the plausible implication of GST on solar generation tariff and on the solar sector as a whole. The study estimates the increase/decrease in solar generation tariff based on two possibly different taxation scenarios under GST regime, since it is difficult to speculate the slab under which each relevant solar energy-linked commodity would fall. The two scenarios are then compared with solar generation tariffs under the current tax regime.

The first scenario considers that the GST rates will be determined based on total applicable taxes, curtailing the current tax exemptions available to solar sector. This translates to 12 per cent GST rate for solar PV system components and a higher 18 per cent GST rate for construction and Operations and

Maintenance (O&M) related services. Based on this, the analysis indicates that the sector could witness an increase in solar generation tariff by nearly 10per cent.

The 10 per cent increase in solar tariff is a result of increased project capital cost by about INR 4.5 million per MW, primarily due to higher import duties and increased taxes levied on construction and operations and maintenance services under the GST regime. Increased capital requirement would also lead to higher repayments to equity and debt investors which would contribute the most (~70 per cent) towards the increase in solar tariff. This could set back the sector in terms of cost competitiveness by about 18 months as per CEEW’s estimates.

Second scenario considers GST rates as per the existing applicable taxes, assuming the tax exemptions are continued to solar sector. This would translate to lower GST rate (five per cent) for solar PV system equipment and standard 18 per cent rate for O&M and civil related activities. The rise in solar tariff, in this scenario could possibly be limited to a marginal increase of about one per cent. The increase is primarily due to applicability of higher

ll THE GooDS AND SERVICES TAxThe government of India is gearing up to rollout the GST by July 1, 2017. The implementation of the GST is no longer a looming mirage since the GST Council, under the supervision of Finance Minister Arun Jaitley, has recently cleared the Draft Compensation Bill for compensating states’ loss due to implementation of the GST. The GST regime has three other legislations that are likely to be finalised in subsequent council meetings – Central GST (CGST), State GST (SGST) and Integrated GST (IGST).

The GST, in its initial form, was designed to have a single tax rate, subsuming multiple indirect taxes with the provision of Input Tax Credit (ITC) to eliminate cascading of taxes. This would have been a revolutionary reform in the existing Indian taxation regime, impacting the entire revenue collection regime. However, the GST Council has proposed to have a four-tier GST tax structure – five per cent for essential items, two standard rates 12 per cent and 18 per cent and a higher tax bracket (28 per cent)for luxury good and de-merit goods that will also attract an additional cess, over and above the higher tax rate levied. Besides the four-tier

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Input Tax Credit (ITC) in GST regime which will eliminate cascading effect of existing tax structure.

Increased competitiveness of domestic solar manufacturers both in domestic and international markets will give a boost to the government’s ‘Make in India’ initiative and could help India to position itself as a leading solar module manufacturer similar to what India has already achieved in the wind manufacturing segment. Currently, India imports almost 95 per cent of total annual solar modules installations, since India only has an installed manufacturing capacity of 1.2 GW for solar cells and 5.6 GW for solar modules. Increased procurement of solar module from local companies, reduced import dependence, could create an additional 37,000 new jobs in India’s solar manufacturing sector by 2022.

ll THE PATH AHEAD• Financial SupportThe GST in the long run seems to have a positive impact on the solar sector, but in the short run GST is going to adversely impact the ever-decreasing solar tariffs and pace of solar deployment in the country. However, these short-term impacts could be controlled by providing financial support to solar developers through

existing policy instruments. The financial support could be extended in the form of Viability Gap Funding (VGF) towards solar projects which will be affected by implementation of the GST Bill in July this year. Further, the government may also consider to reinstate Accelerated Depreciation (AD) benefits to 80 per cent for the next financial year. • Providing Clarifications It is equally vital that the Ministry of New and Renewable Energy (MNRE), Solar Energy Corporation of India Limited (SECI) and other related agencies must provideclarity in the upcoming bids regarding the options/alternatives available to the developers to pursue action for the changed circumstances post the implementation of the GST regime. The model power purchase agreement that was released under the Rewa bid provides a perfect example of how the government could do this. The change in law provision in the Rewa power purchase agreement explicitly covers the event of increase in costs to the developer owing to the implementation of the GST regime, which offers comfort to the developer in terms of risk- alleviation on that front. • Being Revenue Neutral The Government of India collects a mere 0.1 per cent of its total indirect tax revenue from solar sector. Given such insignificant contribution towards revenue collection, solar PV system components could still be taxed at a lower GST rate continuing the current tax exemptions to the sector. This will ensure minimum impact on solar generation tariff and revenue collections.

India’s solar sector requires greater policy clarity and government incentives in the short-term to meet the annual solar capacity addition targets of more than 12 GW in 2017-18. In the long-term, the government needs to nudge the emerging solar sector to develop a robust ecosystem capable of meeting India’s ambitious renewable energy goals. (The writers are researchers at the Council on Energy, Environment and Water – an independent not-for-profit policy research organisation based in New Delhi. They can be reached at anjali.viswamohanan@ceew.in and neeraj.kuldeep@ceew.in)

(Views Expressed by the authors are personal)

GST rate (18 per cent) for O&M and construction activities as against 15 per cent service tax currently being charged.

The increase in solar tariffs would also vary across states; higher for states such as Rajasthan where Value Added Tax (VAT) and Entry Tax exemptions are currently provided for solar equipment, as opposed to Andhra Pradesh and Gujarat where VAT and Entry Tax exemptions are not provided. The actual increase in solar tariff could only be estimated once we have clarity on different GST rates and their applicability to different components.

ll THE BENEfITSThe renewable power sector is plagued

by an “inverted duty structure” on account of taxes (customs, excise, VAT etc.) being incurred on the input side, with the output being tax-exempt. This results in domestic manufacturers paying higher taxes for manufacturing of solar modules in India (with imported components) than in case of tax paid on imported modules. Introduction of GST Bill will eradicate presence of inverted duty tax structure in the value chain of solar cells, modules and panels manufacturing, thus improving competitiveness of domestic manufacturers. The manufacturers will further benefit with the introduction of

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Total increase in solar generation tariff and share of different cost heads if current exemptions to solar are discontinued under the GST

44 | Energy Next | April 2017