The Ministry of Power Recommends a Uniform Tax on Renewable Energy Components of 5%
The GST fitment committee's decision to increase the tax on solar modules from 5% to 12% in September 2021 sent shockwaves through the renewable energy industry, with companies concerned that the increase would render many projects unviable. GST on all solar panels was 5% in September 2021. This was determined during the 2017 revamp of the indirect tax system.
"A simple 12 percent GST on solar energy will prove to be a catastrophic decision for a sizable sector of the renewable energy business," a senior executive at a large solar producer stated. "Not only will this decision wreak havoc on prospective projects, but EPC (engineering, procurement, and construction) firms will face the brunt of this decision," the person added.
The National Solar Energy Federation of India, a trade association representing the interests of renewable energy companies, has written to the Finance Ministry requesting assistance. "At this point, if they are required to pay the additional GST, the implications would be unthinkable, and the business might implode given the continued negative market attitudes in the midst of the turbulence currently experienced by this industry," the federation wrote in its letter.
To undo the damage caused by the increase in taxes on solar power plants, the Ministry of Power (MoP) said that it would write to the Department of Revenue requesting a standard 5% goods and services tax (GST) on all renewable energy components across the country. In this regard, MoP requested renewable energy associations and developers to submit a list of components and raw materials used in the development of solar, wind, pumped hydropower, battery energy storage systems, bioenergy, waste to energy, green hydrogen, green ammonia, carbon capture, and electric vehicles for which the Department of Revenue can propose a GST reduction.
This action follows the CEO of NITI Aayog's demi-official letter to the Secretary of the Department of Revenue calling for a consistent GST rate for all renewable energy components. Additionally, the Ministry of the Presidency urged renewable energy associations and developers to supply the harmonised system code and current GST rate for the suggested components and raw materials.
The GST decrease on renewable energy components is intended to assist India in meeting the "Panchamrit" targets announced by the Prime Minister at the United Nations Climate Change Conference in Glasgow (COP26). By 2030, the 'Panchamrit' aims include increasing non-fossil energy capacity to 500 MW, satisfying 50% of India's energy needs with renewable energy, cutting anticipated carbon emissions by one billion tonnes, and lowering the economy's carbon intensity by 45%. India's fifth goal is to attain net-zero energy by 2070.
In September 2021, the GST council announced an increase in the GST on'specified renewable energy components' from 5% to 12%, which took effect the following month. With the increase in the GST from 5% to 12% on renewable energy equipment, the new effective rate of GST on wind and solar energy is around 13.8 percent. With disruptions to the global solar supply chain, an increase in component prices, and a variety of other issues, the solar business is already operating in a difficult climate. Increased GST rates are projected to exacerbate the situation. Confusion over taxes and sudden rises has traditionally scared international investors, who are critical to funding the country's renewable energy ambitions.
Bigwit Energy believes that increasing the GST rate will have a significant effect on the economic viability of renewable energy projects and on currently under-construction and upcoming projects. Though developers can always seek compensation under the 'Change in Law' clause, they do not wish to become embroiled in a legal morass similar to the one created by GST claims. The solar industry has been pleading for clarification on GST rates for years. Bringing standardisation to renewable energy components would provide the sector with much-needed respite.
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