On Wednesday, the Rajya Sabha passed the GST bill, moving one step closer to making GST a reality. While GST has been widely touted as a positive reform for the Indian economy in general, we explore how GST will specifically impact the Solar Industry.
1. Current and Proposed Tax Scenario
Currently, different tax rates are applicable depending on the nature of procurement. Generic Excise duty rate is 12.5%, Service tax is 15%, Import Duty is 29.4% and VAT 5%-14%. All such rates could be reduced/ exempted basis the actual nature of goods and purpose, depending on state, by using C forms and by availing concessions.
Proposed GST Taxes
Below are the approximate rates for different types of GST or Goods and Service Tax.
|State GST/ SGST||10%|
|Central GST/ CGST||20%|
2. GST- The Upside
2.1 Greater Clarity on Interstate Transactions
Currently each state has its own laws- with states like Rajasthan exempting VAT completely on solar products and diametrically, Maharasthra imposing Octroi and up to 14% VAT. Without a doubt, rationalization of taxes has a big advantage in bringing clarity and making planning of business easier.
2.2 Simpler Compliance
Compliance and filing of taxes will become easier and IT enabled. Hopefully this will mean that rather than separate compliances for Excise, VAT, CST, Service Tax etc, we will need to comply with only GST. This will also make it easier to take input credit- a big leverage for solar EPC companies- where a large part of the turnover is from trading of goods and services.
2.3 True Competition
Currently many solar panel vendors with the manufacturing facilities or warehouses in states such West Bengal or UP, enjoy complete exemption of VAT on the sale of their products. This put the manufacturers in other states that levy 5% VAT at a disadvantage and drove many to new open warehouses for this 5% edge. With the advent of GST, this disparity should be eliminated and there will likely be competition purely on quality and merit.
3. GST- The Downside
3.1 Higher Input Tax = Higher Costs
According to a study by MNRE, the levelized tariff or cost of setting up a solar plant is likely to increase by 12-16% with the introduction of GST which will largely nullify the leaps in cost reduction over the past two years. Currently, different tax rates are applicable depending on the product and the state, with several states such as Rajasthan and UP giving VAT exemption. GST aims to provide a single rate for goods and services and is recommended to exceed 20% which is much higher than the current rates. This would increase the costs of solar projects.
3.2 Removal of Exemptions on Import and Manufacturing
GST is backed by the basic idea of removal of all exemptions. Currently solar enjoys customs and excise duty exemptions on projects larger than 100 kW. Hence, if exemptions are removed for components such as solar panels, inverters, mounting structures and cables used in renewable energy projects, there would be a significant increase in tax cost on procurement.
3.3 Removal of Statuary Inter-State Forms
Currently a concessional 2% CST is available for inter state transactions via statuary C-form. With the introduction of GST this provision would be eliminated and IGST of 20% would be applicable on inter-state procurements with availability of credit in destination States increasing the cost of solar projects.
4. GST- Sunkalp Energy’s Recommendations
- Current tax exemptions, such as on imports (customs) and manufacturing (excise), provided to the renewable energy sector should be continued with GST as well.
- Sale of goods and services to renewable energy projects should be zero-rated, ie the vendors providing such goods and services at nil GST rate should be eligible to avail credit of the GST paid on inputs, capital goods and services used. Wherever, exemptions are not available, concessional rate of GST (both at Central and State level) should be applicable.
- SGST rate on such goods should be uniform across all states under GST- i.e. truly one country, one tax.
- Ancillary products such as battery, transformers which are also used for renewable energy projects are currently liable to taxes at normal rates. Under GST, it is recommended that all the goods used for setting up or operating a renewable energy project should be eligible for relevant exemptions or refund of GST paid on goods and services used for setting up and operating renewable energy project.