On July 1, 2017, India embraced the Goods and Services Tax (GST) legislation. Touted as one of the major financial reforms since Independence, the legislation had initially created apprehension in the minds of taxpayers and entrepreneurs alike.
By Kunwer Sachdev
On July 1, 2017, India embraced the Goods and Services Tax (GST) legislation. Touted as one of the major financial reforms since Independence, the legislation had initially created apprehension in the minds of taxpayers and entrepreneurs alike. Few realize that the reform will be a game-changer for the economy. Let us first try to understand what the legislation entails. Broadly speaking, GST will subsume the whole gamut of indirect taxes such as VAT, Service Tax, central excise tax, octroi into one unified tax. This has multiple ramifications not only for the Indian solar sector, but for the economy as a whole.
To talk about the Indian solar sector, it can be regarded as the future of India’s energy roadmap. India faces the crucial energy dilemma considering that approximately 18,000 villages do not have access to energy, but, at the same time, the country has a strong commitment to reduce its carbon footprint. It is here that solar energy comes to the rescue. It is eco-friendly and hence can play an instrumental role in reducing country’s carbon footprint. The solar energy has the potential to bridge the crucial energy gap especially in remote areas where access to conventional energy is difficult. From the consumer’s viewpoint, switching to solar energy will lead to reduction in burgeoning power bills.
Taking into account these benefits of solar energy, the government has always accorded a slow of incentives to this sector. But the government’s decision to levy 5 per cent GST on solar panels and solar PV cells as against the effective rate of taxation at 0% in the previous regime will, no doubt, lead to marginal increase in project costs. Those who had bid aggressively for solar projects in the past six months assuming that solar panels rates would fall under the new regime would also face some problems during the transitional period. However, the government’s rollback of decision of taxing it earlier at 18% comes as a major respite for the industry. It should also pertinent to mention here that the reduction in the solar tariffs to as low as Rs 2.44 per unit augurs well for the industry as it will offset any increase in project costs due to implementation of GST.
The factor of increase in project costs should not be over-emphasized. One cannot underestimate the favourable long-term impact of GST on the Indian solar industry. Besides removing the cascading effect of taxes, GST will improve cash flows due to change in rates of taxation. Another positive impact of GST is availability of input credit against supply of solar goods which will improve cash flows and EBITDA. GST will also minimize hassles for the vendors like abolition of ‘C’ FORM, ‘F’ form and CST which added to project costs. The decision is also expected to boost inter-state trade directly with customers. Reduction in multiple tax compliances – state as well as central — can be co-related with corresponding reduction in administrative costs. It will also lead to reduction in warehouse costs. For the economy as a whole, GST will lead to abolition of trade barriers across state and which would enable the growth of common market.
So, it would be prudent to state that implementation of GST will not dampen the solar sector if one were to take into account the broader picture. A lower GST rate would have surely been a boon but it would not make a significant dent on the solar sector in the long run. Irrespective of new legislations coming into picture, solar energy will continue to be among the crucial mix of India’s energy roadmap taking into account the country’s ambitious target of solar power of 100 GW by 2022.
(The author is Managing Director, Su-Kam)