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Accumulated ITC & Inverted Tax Structure Affecting Solar EPC

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Solar Power is a source of clean, green energy and the much needed solution to solve our energy woes and fast growing energy demands of development. It is now fast becoming the cheapest source of electricity and is a solution to the electrification needs of remote villages across the country.

Further, being labour intensive, Solar PV is recognized to create more jobs per unit of energy (4 jobs per MW) than any other energy source and hence is promoted by the Indian Government as a solution to the country’s unemployment problems. Thus this industry is critical to the overall GDP growth and equitable development of India.

Indian EPC and more so Solar EPC is an aggressively competitive business with operating margins typically below 10% and net profits between 2-5% even in well managed businesses. Margins have shrunk even further as more and more entrepreneurs have entered this space in response to the Modi Government’s target to achieve 100 GW of solar PV installation by 2022.

However, the recent tax rate introductions under GST law are having an adverse impact on the roof-top solar market and Solar EPC margins in the following ways:

  • Firstly, solar plants were a zero rated product, i.e. they were VAT exempt in many states including Haryana and Rajasthan. Under GST law, a tax on 5% is applicable on roof-top solar plants. The increase in tax has not been accompanied by reduction in base price of the most expensive BOM items such as solar panels.
    • While commercial and industrial customers remain largely unaffected by the 5% tax rate, residential and institiutional customers who cannot take benefit of input tax credit are shying away from the increased net cost.

 

  • Even though tax on solar power plants is 5%, the GST on many of the BOM items is at higher slabs of 18% and 28% making it an inverted tax structure. Thus the input tax on solar components is always significantly higher than what can be offset against out put. An analysis done by Sunkalp Energy, pegs the excess accumulated input tax credit at 2- 2.5 Rs/ W- which is more than 5% of sales price.
    • Even though GST law has a provision for refund of excess accumulated credit there is no clear timeline for the same.
    • Inverted tax structure means an increase in working capital requirements for solar to the tune of 5% or more.
    • The strained cashflow position is making solar EPC increasingly unviable.

There had been positive indications earlier towards retaining solar’s zero rated position. However, there has been no notification towards that yet. In fact, MNRE had implemented Customs and Excise duty exemptions on components used for solar plants. Considering the importance of the solar EPC industry as a livelihood generator, we urge the GST council to review taxes applicable on solar power plant and their components.

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