From, Bridge to India, March 14, 2016.

Recent reports suggest that the changing numbers in India’s upper house of Parliament may mean that the Goods and Services Tax (GST) Bill could be passed by July 2016 (refer). India’s finance minister also claimed yesterday that he is hopeful for the bill passage by mid-May (refer). If the bill is indeed passed as anticipated, it is expected to be implemented almost immediately.

GST is a key taxation reform as it seeks to simplify a complex maze of state and central taxes by subsuming these into a single tax levied at the point of consumption. Renewable sector, currently a beneficiary of several indirect tax exemptions, may be a big loser as a result of GST since the bill proposes to revoke most of the exemptions.

Key highlights:

  • The resulting input cost/ tariff increase of between 12-20% would wipe out the pricing gains of the past two years
  • The cost increase of this magnitude would also put viability of several projects in jeopardy
  • The Ministry of New and Renewable Energy (MNRE) is in dialogue with the Department of Revenue to ensure that renewable power equipment is exempted from GST

A recently concluded study by MNRE suggests that solar project costs and tariffs could go up by 12-20% on account of the new indirect taxation proposal (refer). Such a material increase would erode most of price gains made in the past two years and also put viability of several ongoing projects in jeopardy.

The cost increase would arise because of two reasons: i) currently, no import duty or indirect tax is applicable on solar modules but under the new regime, GST of between 17-20% would be payable; ii) local value added tax (VAT) and other levies such as excise, entry tax and Octroi on solar modules and the complete system, together at around 5% in most states because of many exemptions, would again be replaced by a combined GST of 17-20%. The MNRE report estimates that the cost for all equipment used in a solar project i.e., solar modules, inverters, cables, batteries, structures etc. will go up adding up to a differential of 12-20% from current levels.

Successful passage of the GST bill, although highly beneficial to the wider economy, would severely impact both ongoing and new projects in the sector. MNRE is believed to be pushing for a waiver from GST arguing that a sudden increase in cost would lead to disruption in the sector and delay implementation of policy targets. BRIDGE TO INDIA is of the opinion that the solar sector has a strong case for an exemption. The government has put strong focus on the sector to achieve a very diversified set of policy goals including energy access, energy security and climate change mitigation. Moreover, as the sector is still relatively small, an exemption would not lead to significant loss of revenue in the short-term.