Mercom Exclusive: Effects of 5 Percent GST on Solar in India

India’s Finance Minister, Arun Jaitley, confirmed a solar goods and services tax (GST) rate of 5 percent at the 15th meeting of the GST Council with the official order to the effect still to come. After initial confusion whether the GST rate for solar was 5 percent or 18 percent due to a misprint, the industry is relieved that it was finalized at 5 percent.

The effect of a 5 percent GST rate on a solar project will be between 3.5 - 4.5 percent depending on certain variables unique to the projects and location, a much more manageable situation compared to the initially expected 18 percent rate.

“Developers, manufacturers and suppliers will have to rework their strategies and work the 5 percent GST into their cost structures. Having clarity and certainty without any shred of ambiguity from the government side is key for the sector to move forward without skipping a beat,” said Raj Prabhu, CEO of Mercom Capital Group.

After the rollout of the GST, the current tax exemptions, subsidies, and holidays will end. Key contributors to the increase in solar tariffs after GST will include an increase in operations and maintenance (O&M) costs, component costs and civil and work contracts. The increase in solar tariffs will also vary across states. They will be higher for states such as Rajasthan and Haryana, where the Value Added Tax (VAT) and Entry Tax exemptions are currently provided for solar equipment, as opposed to Andhra Pradesh and Gujarat where VAT and Entry Tax exemptions are not provided.

What Developers, Manufacturers and Suppliers are Saying

In some states, the GST impact will be greater than others. For example, Haryana made solar equipment exempt from the VAT some time ago, but now the 5 percent GST will be applicable. We expect project costs to go up by about 4 percent, stated an Adani Executive.

Mercom’s source at ReNew Power said, “We are sure there will be a significant impact in project costs.” When asked about the effect on its current project pipeline, the Executive added, “for projects with signed power purchase agreements (PPAs), there is a clause which says that they can appeal to the off-taker for some benefits if taxation laws are changed, like in the case of GST.”

Executives at Sterling & Wilson told Mercom, “Project costs are going to spike by a few percentages but refrained from stating an exact number.”

An Executive at Oriano solar said, “Total taxes will be around 4.8 percent of the project cost. With this, the net impact on project costs will increase by 3.5 percent.”

“The present effective tax rate for equipment and solar projects is zero - the 5 percent GST rate will impact project costs marginally,” stated Anurag Garg, Vice-President, Solar & Energy Storage Business, Schneider Electric India in an interview to The Hindu.

A source at Sukra Solar commented that they are expecting an increase in the range of 4-5 percent, while a Rays Power Expert Executive believes that project costs will now increase by a minimum of 5 percent and could go up as high as 7 percent. “This is because everything from modules to inverters and cables will have a minimum increase of 5 percent. Now project costs will go up and tariffs are hitting lows - this is not an ideal situation. Let’s see how the government implements the tax, then we can see the long-term effects, added the Rays Power executive.

“Over the long term, the GST might be beneficial to Indian module manufacturers as only the GST will be applied while many other variable taxes will be eliminated. Many developers are complaining about increases in project cost, but project costs might not increase by a huge amount. Also, the advantages of GST are removing delays and corruption from the system. So, we might also see a decrease in project completion timeframes,” stated a Jakson Solar Executive.

When GST is implemented, large-scale projects will see an increase in project cost by 5-7 percent, all segment of the market will be affected equally. Tariffs will increase due to GST implementation by Rs.0.5/kWh, stated Mercom’s source at Madhav Infra.

What Government Officials are Saying

Officials from the government are generally of the opinion that the effect of the GST on the solar industry will be minimal.

“Solar and coal have been treated on par with both incurring a 5 percent GST rate,” stated an official at Ministry of New and Renewable Energy (MNRE). “The 5 percent GST is a good move as in many states there were multiple duties applied; now there will be a parity in project costs too.”

Regarding the clean environment cess being utilized for GST compensation fund, the MNRE official said, “We are lobbying in the best interests of the solar sector in India, the government will find a way as renewable energy is critical for India’s growth.”

The MNRE official further added, “Project costs are expected to increase marginally, but it is not going to affect many developers. Most developers make project cost assumptions by taking into account such eventualities.”

Another MNRE official told Mercom, “All solar equipment will be under the 5 percent GST tax slab.” This includes, inverters, modules, cells, cables, mounting structures and anything that is utilized in the development of a solar project. When it comes to projects that are under development, “there is clause wherein the project developers can appeal to the off-taker if there is change in tax laws.”

The Indian solar industry is now waiting for official confirmation from the government on all issues and fine print so that work can move ahead with complete clarity and certainty.

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