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GST- How it will affect the Solar Industry- Part 1

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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%
IGST 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

  1. Current tax exemptions, such as on imports (customs) and manufacturing (excise), provided to the renewable energy sector should be continued with GST as well.
  2. 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.
  3. SGST rate on such goods should be uniform across all states under GST- i.e. truly one country, one tax.
  4. 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.

Kanika Khanna

Kanika is passionate about data and technology- and writes about how they apply to roof-top solar.

6 thoughts on “GST- How it will affect the Solar Industry- Part 1

  1. Very well written.. A very clean article with only necessary information for solar professionals
    Thank you
    Prabhu Harakangi

  2. I beg to disagree with point 3.2 of the above article

    The model GST laws uploaded by Finance ministry do talk about the exemption of taxes in the following way:
    Power to grant exemption from tax
    (1) If the Central or a State Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendation of the Council, by notification, exempt generally either absolutely or subject to such conditions as may be specified in the notification, goods and/or services of any specified description from the whole or any part of the tax leviable thereon.
    Explanation.- Where an exemption under sub-section (1) in respect of any goods and/or services from the whole of the tax leviable thereon has been granted absolutely, the taxable person providing such goods and/or services shall not pay the tax on such goods and/or services.
    (2) If the Central or a State Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendation of the Council, by special order in each case, exempt from payment of tax, under circumstances of an exceptional nature to be stated in such order, any goods and/or services on which tax is leviable.
    (3) The Central or a State Government may, if it considers necessary or expedient so to do for the purpose of clarifying the scope or applicability of any notification issued under sub-section (1) or order issued under sub-section (2), insert an explanation in such notification or order, as the case may be, by notification at any time within one year of issue of the notification under sub-section (1) or order under sub-section (2), and every such explanation shall have effect as if it had always been the part of the first such notification or order, as the case may be.
    (4) Every notification issued under sub-section (1) or sub-section (3)and every order issued under sub-section (2) shall
    (a) unless otherwise provided, come into force on the date of its issue by the Central or a State Government for publication in the Official Gazette; and (b) be made available on the official website of the department of the Central or a State
    Government.

    1. Hi Siddartha,

      Thanks for your comment. The point we are trying to make with 3.2 is that all the existing exemptions cannot be taken for granted- they may be eliminated or may be reinstated as per discussions between Central and State Government which is supported by the content shared by you. We hope that the existing exemptions on solar will be appropriately reviewed and approved during the various stages of ironing out GST- as we have recommended in 4.2.

  3. Kanika and Siddartha,

    Thanks for nice summary as well as clarification of stand on exemptions. Lets all hope, for betterment of solar industry, that good things will continue and better things will come in. Solar has really just started in India and a long way to go!

    1. Thanks for your comment Arvind. There are multiple stakeholder meetings happening. We should attempt to send our inputs to the concerned authorities so that necessary steps can be taken for growth of the solar industry.

  4. Thanks Kanika nice article !!
    Lets Hope, existing exemptions would continue further on solar imports & Exports , as said ,solar industries enjoying exemptions on customs duty ,ARE ,VAT etc.. But if they take out exemptions as per latest revision ,companies would reluctant to establish industries further even in SEZ’s(Special economic zones),EOU’s (Export oriented units ) also. It is point less stating that India would reach its dream target by 2022. It turn out to be a set back in present government view on Renewable energy. We see small module manufactures across India with less installed capacity they will suffer a lot ,they cant even move for expansion as high capital equipment tax’s..

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