GST Sparks Cost Escalation Fears For Renewable Energy Sector

The additional financial burden on equipment and accessories after the implementation of the Goods and Services Tax is threatening to disrupt the renewable energy sector.

The tax on machinery, cables and transformers now stands at 18 percent compared from zero in the pre-GST regime. For solar modules, the levy is 5 percent against zero earlier. That's a substantial jump as photovoltaic panels account for more than half of a project's total costs, according to Bloomberg New Energy Finance.

“Overall increase in project costs is about 9-10 percent,” said Vikram Kailas, managing director and chief executive officer of Mytrah Energy (India) Ltd., a renewable power producer. Higher project costs will force producers to seek an adjustment in prices in the power purchase agreements with states, he said.

GST-triggered cost overruns may impact the government's efforts to install 175 gigawatts of renewable energy capacity by 2022. Solar projects comprise nearly 60 percent of the target.

“GST on installation, commissioning has been increased to 28 percent from the earlier service tax of 10 percent. This has made setting up of a project costly,” according to Gajanan Nabar, managing director at Cleanmax Solar, a solar energy firm.

Power purchase agreements provide room for revision in tariffs. While project developers can seek relief from states under this clause, it is unlikely to benefit them much. “The increase in rates may be less than 50 paise per kilowatt hour,” said Jasmeet Khurana, associate director (consulting) at consultancy firm Bridge to India. Also, some developers may not be willing to exercise the provision because that will involve disclosing their purchase details, Khurana said.

For wind power producers, turbines attract 5 percent GST, equivalent to the value-added tax imposed by states earlier. Since some states didn't charge VAT on turbines, developers had the option of buying the machines from there.

Besides, turbine makers sell a bulk of their products under the engineering-procurement-construction contract, which has increased the tax burden of developers, said Santosh Sonar, executive director, indirect tax, BSR & Associates LLP, an auditing firm. EPC contracts have two components – goods and services.

Prior to GST, goods that were exempted from VAT or excise did not attract service tax. “Now under GST, if you are executing a works contract, it will be classified as a service and the rate will be 18 percent which is leading to an increase in the project cost,” Sonar said.