Impact of GST on Energy Sector, GST Impact on Power Sector

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Impact of GST on Energy Sector, GST Impact on Power Sector

Impact of GST on Energy Sector: In the short-run, study suggests a 10 per cent increase in solar tariff as a result of increased project capital cost by about INR 4.5 million per MW but in the long run, GST will eradicate presence of inverted duty tax structure in the value chain of solar cells, modules and panels manufacturing and the introduction of Input Tax Credit will eliminate cascading effect of existing tax structure..

Power is one of the most critical components of infrastructure crucial for the economic growth and welfare of nations. The existence and development of adequate infrastructure is essential for sustained growth of the Indian economy. The government of India is gearing up to rollout the GST by July 1, 2017. The implementation of the GST is no longer a looming mirage since the GST Council, under the supervision of Finance Minister Arun Jaitley, has recently cleared the Draft Compensation Bill for compensating states’ loss due to implementation of the GST. The GST regime has three other legislations that are likely to be finalised in subsequent council meetings – Central GST (CGST), State GST (SGST) and Integrated GST (IGST).

Impact of GST on Energy Sector

India’s power sector is one of the most diversified sector in the world. Sources of power generation range from conventional sources such as coal, lignite, natural gas, oil, hydro and nuclear power to viable non-conventional sources such as wind, solar, and agricultural and domestic waste. Electricity demand in the india has increased rapidly and is expected to rise further in the years to come. In order to meet the increasing demand for electricity in the country, massive addition to the installed generating capacity is required.

Agents under GST

The GST, in its initial form, was designed to have a single tax rate, subsuming multiple indirect taxes with the provision of Input Tax Credit (ITC) to eliminate cascading of taxes. This would have been a revolutionary reform in the existing Indian taxation regime, impacting the entire revenue collection regime. However, the GST Council has proposed to have a four-tier GST tax structure – five per cent for essential items, two standard rates 12 per cent and 18 per cent and a higher tax bracket (28 per cent)for luxury good and de-merit goods that will also attract an additional cess, over and above the higher tax rate levied. Besides the four-tier tax structure, GST has two more categories – goods that lie outside the ambit of the GST and a 0 per cent category for goods that are exempted under GST.

Lack of pass through of indirect taxes contributes to the inefficiencies that have crept into this sector. Unfortunately, this legacy issue is set to continue under the Goods and Service Tax (GST) regime, with generation and sale of electricity being kept outside the purview of GST but capital goods and services used in the energy sector being brought within the GST net.

Currently, tax concessions and exemptions, both at the Central and State level are available on specified goods and services which are used in the energy sector. However, with the GST regime generally set to trim such exemptions and concessions, the effect on the energy sector may be significant

Impact of the GST on the Solar Sector

A recent study published by the Council on Energy, Environment and Water (CEEW), “GST: A Good Solar Tax?” highlights the plausible implication of GST on solar generation tariff and on the solar sector as a whole. The study estimates the increase/ decrease in solar generation tariff based on two possibly different taxation scenarios under GST regime, since it is difficult to speculate the slab under which each relevant solar energy-linked commodity would fall. The two scenarios are then compared with solar generation tariffs under the current tax regime.

The first scenario considers that the GST rates will be determined based on total applicable taxes, curtailing the current tax exemptions available to solar sector. This translates to 12 per cent GST rate for solar PV system components and a higher 18 per cent GST rate for construction and Operations and Maintenance (O&M) related services. Based on this, the analysis indicates that the sector could witness an increase in solar generation tariff by nearly 10 per cent.

The 10 per cent increase in solar tariff is a result of increased project capital cost by about INR 4.5 million per MW, primarily due to higher import duties and increased taxes levied on construction and operations and maintenance services under the GST regime. Increased capital requirement would also lead to higher repayments to equity and debt investors which would contribute the most (~70 per cent) towards the increase in solar tariff. This could set back the sector in terms of cost competitiveness by about 18 months as per CEEW’s estimates

Second scenario considers GST rates as per the existing applicable taxes, assuming the tax exemptions are continued to solar sector. This would translate to lower GST rate (five per cent) for solar PV system equipment and standard 18 per cent rate for O&M and civil related activities. The rise in solar tariff, in this scenario could possibly be limited to a marginal increase of about one per cent. The increase is primarily due to applicability of higher GST rate (18 per cent) for O&M and construction activities as against 15 per cent service tax currently being charged

The increase in solar tariffs would also vary across states; higher for states such as Rajasthan where 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. The actual increase in solar tariff could only be estimated once we have clarity on different GST rates and their applicability to different components

Increased cost of energy projects

Status of exemptions and concessions: While goods and services required for setting up energy projects will be subject to GST, they will not be creditable for the generating entity leading to a cascading of indirect taxes. Under the current indirect tax regime, various concessions and exemptions are available for setting up energy projects, especially in the renewable energy space to counter such cascading effect. However, there is no clarity on whether these concessions/ exemptions will continue under the GST regime.

Impact on renewable energy

Owing to the higher set up costs of renewable energy projects, tariff rates for clean energy are generally not competitive vis-à-vis conventional energy. With a view to encourage clean energy, multiple tax concessions and exemptions have been extended to the renewable energy sector. As a result, green energy is generally available at reduced tariff rates. However, there is no clarity on whether such benefits would be extended under the GST regime. It is necessary that the government continues to offer tax breaks to the renewable energy sector, for it to remain a competitive option to conventional fuel based energy. One possible option could be to zero rate supplies to renewable projects. This would remove GST incidence at the terminal stage, and also enable suppliers to obtain tax refunds of their own input costs.

Issues under existing power purchase agreements

Power Purchase Agreements (PPAs) generally provide for pass through of existing indirect taxes by way of incorporating the costs thereof into the contract price. However, PPAs generally provide for contract prices to be adjusted on account of any increase in taxes or introduction or change in taxes.

GST Council: It’s roles, Powers & matters discussed

Generally, introduction of GST would be seen as ‘Change in under most PPAs. However, for those PPAs that do not provide an adjustment to cover increase or introduction of taxes, the introduction of GST would result in an escalation of contract prices.

Reduction of legacy issues

Power projects, especially at the engineering, procurement, construction (EPC) stage, are plagued with issues centered around the indirect tax treatment of works contracts, which is complicated due to different aspects of such contracts being subject to service tax and VAT. Even splitting of supplies and services into separate contracts does not necessarily help address the issue as it often leads to litigation with indirect tax authorities.

This is because they still seek to treat such contracts as composite works contract (involving supply of both goods and services), especially if there is a ‘wrap agreement’ or ‘cross-fault breach clause’ (a clause providing common indemnity across the contracts). EPC companies also face challenges on valuation of such contracts as authorities often claim that value of one type of supply has been artificially deflated in favour of the other, to take advantage of any rate arbitrage.

The GST Law specifically treats a ‘works contract’ as a ‘service’ and the whole value is likely to be subject to a uniform tax rate. This is likely to address the ambiguity and reduce disputes.

GST Impact on Power Sector

Power is vital for the manufacture of capital goods as well as services. However, the tax structure for this sector is not yet rationalized. It is time to rationalize the tax structure for this sector. The current scenario for the power sector is not so bright. This sector is currently enjoying CENVAT exemption or concessional rates at the federal level. As a result, the sector is not fortunate for the input tax credits. Hence, the taxes are included in the power equipment costs. The sector is not benefitting from the tax credits with respect to the VAT imposed on the inputs by the state.

Key Points:-

  • Increased cost of energy projects
  • Impact on renewable energy negative
  • Problem in power purchase agreements

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