Solar power companies fret over GST cost; find out why

By: | Updated: July 11, 2016 6:58 AM

Lack of clarity on how the likely additional costs as input taxes in the upcoming Goods and Services Tax...

Goods and Services Tax, GST, GST bill, gst news, gst 2015, gst india, Congress, Arvind SubramanianCurrently, the solar power equipment are largely exempt from indirect taxes across states but implementation of GST would mean a possible 18% tax on them.

Lack of clarity on how the likely additional costs as input taxes in the upcoming Goods and Services Tax  (GST) regime would be allowed as a pass-through by the regulators has put the potential bidders for solar power projects in a bind. At stake are solar projects with combined capacity of at least 8 gigawatt (GW) for which the Centre and several state governments are slated to issue tenders in the remaining part of this fiscal year.

Currently, the solar power equipment are largely exempt from indirect taxes across states but implementation of GST would mean a possible 18% tax on them. With electricity likely to remain outside the ambit of GST, the companies won’t be able to offset the input taxes. The threat of cost increase in the GST regime exists for all power developers, including thermal power units, but the issue is more serious for solar and wind power firms.

In the case of solar firms, capital costs make up almost the entire chunk of the generation cost and variable costs are minimal. Also, unlike thermal power companies — mostly owned by diversified corporate groups, most solar firms won’t be able to offset the input tax costs against tax liabilities on outputs other than power.

“Although the government has said that the regulators would decide the impact of GST on solar projects as this would be considered under “change in law” clause in power purchase agreements, it is not clear how they would calculate the pass-through; unlike thermal projects, solar project tariffs do not have variable and fixed cost components,” Manoj Gupta, vice-president of solar division at Fortum India said.

Solar tariffs represent composite price encompassing all related costs including the internal rate of return for the project and hence solar projects are less amenable to accurate calculation for cost pass-through, some analysts feel.“We need a clear view from the government regarding the ambit of GST and its impact on solar power projects. At this point, I am not sure whether to factor GST in upcoming bids,”  Sanjay Aggarwal, managing director, Fortum India told FE. Factoring in GST could put a bidder at the risk of being out-priced by competitors who haven’t done so. If you don’t budget for GST, then you could end up with an unsustainable project.

“The increase in cost of electricity (in the GST regime) could be maximum for the renewable sources such as the solar and wind. Solar panels, wind turbines, towers, and all other inputs would attract GST at the rate of 18%, with no benefit of input tax credit. This would directly translate into a cost increase of 18%. In the case of gas and coal-based generation too, a similar scenario would prevail,” Satya Poddar, senior tax advisor at EY had told FE earlier.

While GST would adversely impact all the renewable energy segments, the issue is particularly vexing for solar developers due to the nature of such projects that require not more than 18 month for commissioning. This means such projects, especially those being bid out in the next few months, could be straddling two different taxation regimes, if GST comes into effect from  next April. In case of wind power, the government has announced bidding route for procuring power but the process is still some time away while thermal projects require 3-5 years for commissioning, making it easier for them to absorb the change.

“The developers’ concern regarding the ambiguity on one of the bid parameters is legitimate. Ideally, the ministry of new and renewable energy and the central electricity regulatory authority (CERC) should disclose the mechanism or formula that would be used for passing through the resultant increase in input cost when GST is implemented,” Jasmeet Khurana, associate director-consulting at Bridge to India told FE.

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