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Accumulated ITC & Inverted Tax Structure Affecting Solar EPC

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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The Global Grid: Cooperation for Sustainability

Abstract
The world today faces four faceted energy challenges of supply, security, access and de-carbonization. In a highly interdependent world where renewable energy is becoming an increasing part of the global energy mix, this paper proposes global energy connectivity as an important part of the solution. We analyse the technical and political aspects of energy connectivity and present several case studies to be referred to by policy makers as they prepare for global energy connectivity.

Download complete paper: The Global Grid

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GST Rate Schedule for the Solar Industry

The past few months were marked by substantial speculation around how GST will affect the solar industry. Sunkalp Energy had run a few analyses which had indicated a 12-15% increase in the cost of solar. Further we had made some recommendations for including solar and components in ‘zero’ lists.

This Friday the Government released final Goods and Services Tax (GST) rates under the new indirect tax regime proposed to be rolled out from July 1. Below GST rates will be applicable on solar goods:

  • Solar Panel -5%
  • Solar Cells -18%

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Two Point Four Four- Bhadla Solar Park Results

We look on in disbelief as the results of aggressive bidding for the Bhadla Solar Park were announced today. ACME and SoftBank Energy won the tender to supply electricity at Rs. 2.44/ kWh and Rs. 2.45/ kWh respectively. The results came after open bidding that spanned two days and thirteen participants that included Hero Solar and Renew Solar Power.

Solar tariffs are in a state of free fall, these results come on the back of the widely celebrated results of Rs. 3.3/ kWh for REWA Solar Park in Madhya Pradesh, barely 4 months ago.

At Rs. 2.44 per unit, electricity from the Bhadla Solar Park will be 25% cheaper than that from coal power plants.

Only one question remains to be answered: Is this sustainable or a bubble waiting to burst?

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