Impact of new GST rates on Solar Industry

Impact of new GST rates on Solar Industry

The Goods and Service Tax (GST) Council’s decision to raise GST on solar components from 5% to 12% from October 1, 2021 will create huge impact on project costs

Under the existing regime, 70% of the gross value of the contract was considered for the supply of goods, attracting a 5% rate – which will now be 12%.

This is in the case of a contract of supply for solar power generating systems. The remaining 30% is for the supply of taxable services, attracting a GST rate of 18%.

Challenges faced by Developer

The following are the key challenges that will be faced by developers:

• The new recommendation by the GST council, increasing the proposed tax to 12% for renewable energy projects, will create a fresh set of challenges for the sector to address.
• The increase in GST will create a significant impact on both the ongoing and upcoming projects.
• Utility-scale, open access, and OPEX projects will be the most affected projects. The projects’ power purchase agreement tariffs would have to be increased to accommodate the new tax structure.
• Due to the inverted duty structure, wherein there is no GST levied on the sale of power, the GST paid for the renewables project would become a cost.

Overall Impact on Projects

The overall projects will get impact because of following reasons:

• Over the last six months, the rising price trends in commodities, including steel, aluminium, and copper, had already increased the burden on the solar industry. With the proposed increase in GST now, the challenges have increased for developers. The solar sector had just begun to recover from the impact of the second wave of the Covid-19 pandemic.
• The increase in GST rates will increase the overall solar (power) capital cost by 4.5% and tariffs are expected to go up by about 10 paise approximately.
• 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.

SolarMart’s views on this

India is a price sensitive market. This step by government may be a way to plug in the gap on tax holiday that the developers are taking advantage of until next year.

The overall impact shall be as follows:

• Such a massive increase in taxes will negatively affect the domestic players as well.
• Under the earlier tax structure, the GST component of the project cost was 8.9%, which has now been increased to 13.8%. An overall cost escalation of 4.9% is bound to influence consumer sentiments negatively.
• There will be prolonged tariff change applications by all developers under the change in law mechanism. DISCOMs, which have been averse to any cost escalation in solar tariffs, might find the new tariffs unattractive.
• Over one GW of projects across the rooftop and open access segments will be adversely affected.

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