Higher GST from today likely to affect solar power rates

Levy of higher GST on some solar equipment from 1 October could raise capital cost by 4.5%

Gireesh Chandra Prasad, Utpal Bhaskar
Updated1 Oct 2021
The GST Council, at its meeting on 17 September, recommended an increase in GST on specified RE devices from 5% to 12%. Bloomberg
The GST Council, at its meeting on 17 September, recommended an increase in GST on specified RE devices from 5% to 12%. Bloomberg

India’s solar power tariffs are expected to go up by around 10 paise per unit with a higher goods and services tax (GST) to be levied on cells, modules, and inverters from 1 October, said several developers and analysts..

The GST Council, at its 45th meeting on 17 September, recommended increasing GST on ‘specified renewable energy devices and parts’ from 5% to 12% with effect from 1 October.

This increase in GST is expected to increase the capital cost by 4.5% and comes against the backdrop of solar tariffs firming up in recent auctions after hitting a record low of 1.99 per unit in December 2020. India’s solar tariffs are on an upswing because of factors such as higher commodity prices and an increase in the cost of imported solar equipment from April next year.

“Solar (power) capital cost and tariffs are expected to go up by about 4.5% and 10 paise respectively. The timing could not be worse as developers have planned large shipments to take advantage of duty-free window before basic customs duty (BCD) kicks in next year. There is unfortunately too much movement in duties and taxes, adding to investor concerns on the back of other issues such as hike in equipment prices and environmental issues for transmission lines,” said Vinay Rustagi, managing director at consulting firm Bridge to India.

Indian green energy projects have been facing several problems. A case in point is the concern about the impact of electricity transmission lines being put up for green energy projects, which happen to pass over the habitat of the endangered Great Indian Bustard.

“I think this is the reality we have to live with. Whatever impact it has on tariff, it has. It also means that the renewable (energy) market is maturing and does not need support mechanisms to make it attractive. The only trouble is that so many changes in taxes and duties come in and in a business model where the tariff is fixed for the power purchase agreement (PPA) term, it plays havoc with the returns,” said Sanjay Aggarwal, president, Fortum India Pvt. Ltd, owned by Finland’s state-controlled power utility Fortum Oyj.

India’s solar power tariffs have been on a rebound from the record lows of December. Also, rising commodity costs, and 40% BCD on solar modules and 25% on solar cells to be imposed from April 2022 are influencing auction rounds and developers’ bids.

“While it is true that changes get covered under changes in law, the whole industry is struggling to get that operationalized. So, as long as change-in-law issues are fixed swiftly without knocking on so many doors and spending abnormal time and resources to get something that was anyway legally due to the developer, we need to adjust to the new reality,” Aggarwal said.

India runs the world’s largest clean energy programme and aims to achieve 175 GW of renewable capacity, including 100GW of solar power, by 2022.

“The increase in GST on solar products may have an upward impact on costs. The need for such increase in tax must be carefully evaluated against the ultimate impact it may cause on project costs and tariffs,” said Somesh Kumar, power and utilities leader, EY India.



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