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GST Preparedness by HFE

The renewable energy sector presents a unique opportunity to meet climate goals while fueling economic growth, and hence, the need for scaling up renewables is now undisputed. But, with the implementation of a unified Goods and Services Tax (GST) regime, the power producers will be plagued by the policy change and regulatory bottlenecks. Within days of the Parliament passing the Constitution Amendment Bill for rolling out GST in India, HFE has started preparing for the impact.

The sector currently enjoys various fiscal incentives that will come to an end in the new GST regime. The indirect tax reform through GST could, therefore, hike renewable energy costs and pricing.

Main taxes to be subsumed for the Renewable Energy Sector

With India gearing up to introduce a comprehensive Indirect tax regime under GST, all existing Indirect taxes, barring a select few, would be subsumed into the new GST, especially for renewables.

  • Excise Duty
  • Service Tax
  • VAT/CST of all states
  • Additional custom duty and special additional custom duty
  • Entry tax
  • Purchase tax
  • Octroi

Taxes on sale of electricity have been proposed to be kept outside GST. In such case, the electricity generated by renewable sources would continue to be outside the GST regime.

Making Electricity Taxable as the Solution

Electricity is, at present, exempt from Excise duty and VAT. Only electricity duty is levied on its consumption by the States. Looking at the present scenario, keeping electricity out of the GST Law will increase the cost of generation and distribution of power, as credit for taxes paid on inputs used in these processes will be disallowed.

Thus, various taxes that are levied on goods and services procurement, on both Operation & Maintenance charges and Capital procurements, get rooted in the cost of the end product. Moreover, the advantage presently available to HFE, which is purchase of goods for the generation and distribution of power from other States at a concessional rate of tax (CST) of 2% shall no longer be available under the GST regime.

If electricity is taxable under GST, full credit would be available for the taxes paid on the inputs, which will significantly reduce the cost of power projects and consequently the cost of power generation and distribution. Thus, the lower costs will also benefit the downstream industries.

The Road Ahead For Power Producers

The Government has always strived to promote the renewable energy sector and accordingly, various exemptions have been provided to the sector. A few of these include:

Renewable Energy

  • Customs duty exemptions/concessions on import of goods
  • Excise duty exemptions/concessional rates procurement of goods to be used in production of renewable energy
  • Exemption/ concessional rate under various State VAT legislations on sale of goods to be used for generation of renewable energy

Solar

  • Exemption from BCD on solar panels, cells and modules. ACD and SAD provided to all items of machinery, transmission equipment, etc. used for setting up of solar power plant.
  • Excise duty exemption provided to all items of machinery, transmission equipment, auxiliary equipment etc. used for setting up of solar power plant.
  • Various states charge concessional rate of VAT @ 5% on renewable energy devices and spare parts/components. Certain states like Rajasthan provides exemption to solar energy equipment and plant and Machinery including parts thereof, used in generation of Electricity from Solar Energy or Wind Power Lower rate of VAT has been provided on inputs for bio-fuel sector in few States.

Wind

  • Concessional rate of BCD of 5% and exemption from ACD and SAD provided on import of various components used by a wind power plant like wind operated power plant
  • Excise duty exemption provided to specified goods/parts used for manufacture on products which may be used in a wind operated power plant

Solar power equipment enjoys zero customs duty, while a 5% duty is levied on importing wind energy equipment. Being on ‘zero’ custom status other duties like countervailing duty or special additional duty are also ‘zero’. And the renewable sector is also exempt from VAT and excise duty. But all this will change with the GST and tariffs will go up by at least 10%.

Preparedness for GST

HFE has made presentations before the government to work out a possible scenario of these impacts and keep renewable sector outside GST, and this matter will be looked into.

If the council considers renewable power as a “deemed export” or merely assign a “zero” GST rate on clean energy, it will allow HFE, including other power producers, to get a refund of all taxes previously paid on the raw materials and services. There is no excise duty on solar panels, but states levy 0-5% concessional VAT on them and there is a 2% central sales tax in case of inter-state supply.

In the longer run, GST would result in reduced costs of operations making the renewable energy sector more competitive. This anticipated simplification and ease of trade is also expected to bring in faster economic growth for the country. All said, the ground level reality is that India’s sustained economic growth continues to drive demand for power, being as one of the significant contributors to the country’s GDP, and with the Government’s focus on “Power for all”, the need to prepare, participate and contribute to its success, is the only way forward.

Contributed by Debnath Mukhopadhyay, Head Finance & Accounts, Hero Future Energies

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