Don’t Tax Clean Energy

GST Council’s confusion on solar power casts doubt on its commitment to renewables

Written by Kanika Chawla | Published: June 30, 2017 12:30 am
GST, GST schemes, GST Rate Schedule, National Environment Fund, GST effects   Chapters 84 and 85 of the GST rate schedule suggested that all solar power generating systems will be taxed at 5 per cent. (Picture for representational purpose)

The GST Rate Schedule for goods left the solar sector, particularly grid-scale developers, confused. The schedule had convoluted wording and put “solar power generating systems” and “photovoltaic cells whether or not assembled into modules or made into panels” into different tax brackets. Chapters 84 and 85 of the GST rate schedule suggested that all solar power generating systems will be taxed at 5 per cent (similar to the tax on wind systems). This would put solar and wind in the same tax bracket as coal. Coal was previously taxed at 11.69 per cent. Nuclear fuel too, as per chapter 28 of the rate schedule, will be taxed at 5 per cent.

However, interestingly, chapter 85 of the GST rate schedule noted that semi-conductor devices including PV cells, which may or may not be assembled into modules or panels, would be taxed at 18 per cent. The principal conflict lay in the interpretation of chapter 85. While a recent clarification from the council has put solar panels in the 5 per cent category, the issue of tax on the remanining components of solar systems remains unresolved even on the eve of the rollout of the new fiscal regime.

In the first scenario, utility scale solar (panels and parts), along with other renewable energy sources of electricity as well as coal, is taxed at 5 per cent. Analysis suggests that, in this case, the GST would result in a minor rise of 1.6 per cent in solar tariffs. In a thriving solar market, this is unlikely to create any setback for the sector.

In the second case, solar panels are taxed at 5 per cent but different balance of systems are taxed in higher tax categories, the implications could be non-trivial. The cumulative effect of these tax brackets could raise tariffs by over 5 per cent. Based on the recent record low solar tariffs, the new tax regime could take tariffs up from Rs 2.44/kWh to Rs 2.56/kWh. This price rise, if passed on to the utilities, would further increase the financial liability of utilities.

While 5 per cent doesn’t seem a mammoth figure, the rise in price of solar power is not insignificant when seen in conjunction with the decline in taxes on coal. The 60 per cent decline in taxation on coal is likely to make thermal power cheaper by as much as Rs 0.15. This would set back some of the rapid advances made in recent times to close the price gap between the prices of solar power and thermal power. The cumulative result, with a lower tax bracket for coal and higher (effective) tax implication for solar, would do little to incentivise already apprehensive utilities to purchase more solar power.

Given the government’s repeated expression of its firm commitment to renewable energy, this choice of tax structuring continues to mystify. As the sector awaits clarity, speculation continues on whether the accelerated pace of tariff decline for solar power has resulted in the easing (or even reversal) of policy support for the sector.

The change in the tax regime would also be accompanied by a change in use for the coal cess. The cess, currently contributing to the National Environment Fund (NEF) with a mandate to finance and promote clean energy initiatives, is a carbon tax that will now be redirected. Collections from the cess on coal are now expected to be used to compensate states for the loss of revenue due to the GST regime. Between 2010 and 2017, this cess has been used to make budgetary allocations to the ministries of New and Renewable Energy; Environment, Forests, and Climate Change; Water Resources, etc. After accounting for the expected budgetary allocation of 2017-18, the fund stood at Rs 8,000 crore. It remains to be seen if this unspent amount would also be used to compensate states for loss of revenue, or if this amount would be directed towards furthering the objectives of the NCEF.

As India stands at the cusp of two major transitions, one in its fiscal regime and the other in its energy system, there is need for clarity in policy and coordination of objectives between the two. Could the decision of the GST Council inhibit the solar revolution, rather than enable it?

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  1. Ankit narula
    Jul 3, 2017 at 11:31 am
    Correct me on my following understanding: the expenditure required around solar projects, including transmission network (wires and cables: product code 7413, 7614 8544) are taxed at 18 (under code 9801) electrical protection (8536) insulated cables (8544) are taxed at 28 . Doesn't it impact the project costing, of if these are included under "Renewable energy devices spare parts"?
    1. C
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      1. Mahender Goriganti
        Jun 30, 2017 at 4:46 pm
        Just like after Demonetization now con medias all over India are providing covers and spewing venom to protect their con thieves Islamic Express at the fore front.
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            Parth Garg
            Jun 30, 2017 at 2:19 pm
            GST is all round confusion compounded. It is a clearly visible disaster.
            1. C
              Jun 30, 2017 at 5:50 pm
              It is and Indians will pay dearly like the Australians are now. It was only after the introduction of the GST in 2000 that prices of goods and services and food started to quadruple. Australia has now become one of the most expensive countries in the world. At first, the government of the day promised that a wide range of taxes like the excise, s, customs, and stamp duty would be done away with, but after a year these taxes were re-introduced in various forms and names. In a country like India where the government has no control over prices, the rift between rich and poor will widen.
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