GST: Shadow over solar power

The new Goods and Services Tax (GST) regime is likely to disturb the dream run the solar power sector has been seeing recently.

Solar power generating systems fall in the 5 per cent category but the modules and other basic equipment are in 18 per cent bracket. Cables, transformers, etc — components for power supply — would fall under the 28 per cent slab. 

All these would be passed through to the consumer and would impact the low tariffs that developers have been offering till about last week.

The ministry of new and renewable energy had said the sector would be insulated from any increase in rates. Sector experts, however, see this as a significant disruption that could even lead to cancellation of some projects.

Most power project developers source generating units from engineering, construction and procurement (EPC) contractors who build the system by sourcing various equipment. 

All the cost is factored in the final bill. Even the imported components would come under the same tax regime from July 1, 2017.

“There are two major impacts of the new tax brackets. The power purchase agreements (PPAs), which are yet to be signed for upcoming projects, would witness tariff escalation. Projects that have already signed PPAs might see tariff resetting,” said an executive.The sector could also see some issue around debt financing, refinancing and financial closure due to changes in tax structure.

“We believe that this process will be complex and challenging,” said Bridge to India in its latest report. “First, there are multiple templates for power purchase agreements because of changes in law. Second, discoms will obviously resist any tariff increase, particularly when tariffs for new auctions are reaching all-time lows. Third, the entire process for tariff determination, ratification and documentation amendments would easily take up to 6 months or even more.” 

Many developers would be under pressure to complete projects on time and lenders unwilling to fund extra costs. “It wouldn’t be surprising if this process leads to cancellation of some projects altogether,” the report added.The industry is expecting the cost of solar power projects and tariffs to escalate. 

“It is better that the government clarify the duty structure for the sub-components of solar generating systems. The cost of component needs to be in alignment with the final product,” said Lalit Jain, chief commercial officer at Moser Baer Clean Energy Ltd. Amit Kumar, partner, PwC India, pointed out the GST regime for the solar sector overshadows the idea of promoting domestic manufacturing in solar. 

“The new tax brackets do not promote domestic solar manufacturing in any way. The last few bids had factored GST in their bids, but at the 5 per cent rate. Future bids could see some escalation because 18 per cent tax on equipment was not envisaged.”