GST for Renewable Energy Sector in India

With the current indirect tax regime being in a mess, India has introduced the comprehensive Indirect tax regime under GST – Goods and Services Tax. Sale of electricity has been proposed to be kept out of GST. Thus, electricity generated through clean sources would continue to be out of the GST regime. Nevertheless, the value chain involved for generation of power through renewable sources should be listed under the GST regime.

According to the media and industry reports, taxes on procurements for renewable energy sector would increase leading to increase in cost of purchase of renewable energy. Therefore, this would yield a negative impact for the sector.

Factors for negative effect under GST

With the objective of promoting the renewable sector, the Government has provided various exemptions to the sector. These include: Customs duty exemptions/concessions on import of goods used for the renewable energy sector, excise duty exemptions/concessional rates on generation of renewable energy, exemption/concessional rates have also been provided under various state VAT legislations on sales of goods that are used for generation of electricity through renewable sources. These exemptions decrease the cost of procurement incurred for setting up a renewable energy power plant thus making it lucrative for power producers.

Now to compare this to the proposed GST regime. GST’s objective is to provide a one tax regime, thus, all the exemptions will be reduced, increasing the cost of procurements significantly. In addition, electricity duty would continue to be outside GST, further burdening the power producers. Also, it is pertinent to note that the impact of tax would vary from project to project based on procurement pattern. (Import/domestic purchase)

With implementation of GST, MNRE has analysed that power producers should expect an increase in the tax rates. Presently, different tax rates are applicable depending on the nature of procurement of goods and services. Rates such as excise duty (12.5 per cent), service tax (14.5 per cent) and VAT (5 – 14 per cent) could be reduced depending on the actual nature of goods. GST which aims to provide one rate for goods and services, the Select Committee recommends should not exceed 20 per cent. A GST rate of 20 per cent will significantly increase the procurement cost of goods and services for the renewable energy sector.

It is likely that implementation of GST would result in removal of statutory forms. As of now, inter-state procurements are liable to Central Sales Tax (CST) which is limited to 2 per cent. Under the GST regime, doing away with these statutory forms could result in inter-State procurements being liable to Integrated Goods and Services Tax (IGST) at 20 per cent. Thus, a substantial increase in tax costs directly impacting the cost of purchase of renewable energy.

Recommendations

Indian Government has set targets of installation of 175 GW of electricity generated through renewable energy sources by 2020. The Government has introduced numerous incentives for both solar and wind energy sector. In line with Government’s focus of promoting this sector, MNRE recommends a few points for the proposed GST regime for the renewable energy sector. The tax exemptions provided to the sector should be continued under the GST regime. All categories of goods supplied to a renewable energy project should be supported with exemptions. VAT rate with respect to the sector varies from state to state. MNRE recommends that the State GST (SGST) should be uniform across states.