The goods and services tax (GST) Council is likely to clarify on the tax rate applicable to solar modules at its next meeting in early June, which might reverse a decision to set an 18% rate on the key component of solar energy infrastructure, company executives say.
Under the final GST rates, which takes effect on 1 July, solar modules have been classified under an 18% tax slab; the present effective tax rate on them is zero.
The ministry of new and renewable energy (MNRE) has informally communicated to the sector that this might be an anomaly and that a clarification is likely to be issued when the GST Council meets on 3 June, according to companies.
The clarification could likely set the tax rate on solar modules at 5%—similar to that on the wind sector. Solar modules make up for about 60% of a solar project’s overall cost and eight out of 10 top module suppliers in the Indian market are from China. Prominent Indian module makers include Waaree Energies Ltd, Tata Power Solar Systems Pvt. Ltd and Vikram Solar Pvt. Ltd.
New tax rates would hit more than 10 gigawatt (GW) of ongoing utility scale projects and pose a threat to their viability, clean energy-focused consulting firm Bridge To India said in a 22 May report.
India has 12.28GW of grid-connected solar power installed and it is expected to be the third largest solar market in 2017 with total capacity touching 18GW. India has a target of setting up 100GW of solar capacity by 2022. Solar power tariffs have fallen by about 25% in the past three months, raising questions on the viability of the projects.
Vinay Rustagi, managing director at Bridge To India, said clarity on whether modules will be under the 5% or 18% tax slab could come when the GST Council meets.
“Assuming that does not happen, this will be a major problem for the ongoing projects because it will result in 10-12% impact on the capital cost, which will be very significant for all these companies. And they would definitely try to invoke the ‘change of law’ provision and pass on the additional tariff to the distribution companies,” Rustagi said.
Most firms are under pressure to complete their ongoing projects before 1 July, according to Rahul Gupta, managing director, Rays Power Experts Pvt. Ltd, a solar parks developer. “Everybody would demand change of tariff under the ‘change of law’ provision in power purchase agreements (PPAs) if modules will be charged an 18% duty from being fully exempt till now,” Gupta said.
Typically, PPAs provide for protection to developers of renewable energy projects against any change in law, and they are allowed to seek a tariff revision from the central or state regulator, which would then review requests on a case-by-case basis. But this process can be lengthy and difficult, according to Sanjeev Aggarwal, chief executive at rooftop solar firm Amplus Energy Solutions Pvt. Ltd.
“PPAs signed earlier may not allow for a change in tariff, but for future projects, the provision may be invoked,” Aggarwal said.
Rustagi of Bridge To India said: “The problem is two-fold; the change of law provision is not crystal clear; in many cases it does not allow for a pass-through of any tax change to the distribution companies. Second, the process of determining what the additional hit to the companies is likely to be complex and time consuming.”