With the objective to reduce multiplicity of indirect taxes which is currently levied on transaction in India and in order to mitigate the cascading effect, double taxation issues that are plaguing the current Indirect tax regime, India is gearing up to introduce a comprehensive Indirect tax regime under GST. All existing Indirect taxes, barring a select few, would be subsumed into the new GST. But will that objective be really achieved, is a big question, especially for the sectors which are intended to be out of GST regime like power, petroleum, alcohol for human consumption, etc.
Taxes on consumption or sale of electricity have been proposed to be kept outside GST. In such case, the electricity generated by renewable sources would continue to be outside the GST regime.
Electricity is held to be a ‘good’, but it is presently exempt from Excise duty and VAT. Only electricity duty is levied on its consumption by the States. Looking to the present scenario, keeping electricity out of GST Law will increase the cost of generation & distribution of electricity as credit for taxes paid on inputs which are used in these processes will not be allowed. Thus, various taxes that are levied on procurement of goods and services (on both capital procurements as well as Operation & Maintenance charges) get embedded in the cost of the end product. Moreover, the advantage which is presently available to the Power Companies i.e. purchase of goods for the generation and distribution of electricity from other States at a concessional rate of tax (CST) of 2% shall no longer be available under GST regime. Thus, the other sectors will also be majorly impacted.
Hence, if electricity is taxable under GST, full credit would be available for the taxes paid on the inputs which will significantly reduce the cost of power projects and consequently the cost of generation and distribution of electricity. Thus, the lower costs will also benefit the downstream industries. Since, electricity is kept outside the GST regime, it will have an adverse impact due to various key factors viz.
- (i) increase in tax costs due to removal of exemptions
- (ii) tax burden due to increase in tax rates from the current applicable tax rates
- (iii) increase in cost as purchase at concessional rates against statutory forms will be done away.
(i) Increase in tax costs due to removal of exemptions : The Government has always strived to promote the renewable energy sector and accordingly, various exemptions have been provided to the sector. A few of these include:
- Renewable Energy
- Customs duty exemptions/ concessions on import of goods
- Excise duty exemptions/ concessional rates procurement of goods to be used in production of renewable energy
- Exemption/ concessional rate under various State VAT legislations on sale of goods to be used for generation of renewable energy
- Exemption from BCD on solar panels, cells and modules. ACD and SAD provided to all items of machinery, transmission equipment, etc. used for setting up of solar power plant.
- Excise duty exemption provided to all items of machinery, transmission equipment, auxiliary equipment etc. used for setting up of solar power plant
- Various states charge concessional rate of VAT @ 5% on renewable energy devices and spare parts/ components and parts like Tamil Nadu, Gujarat, etc. Certain states like Rajasthan provides exemption to solar energy equipment and plant and Machinery including parts thereof, used in generation of Electricity from Solar Energy or Wind Power Lower rate of VAT has been provided on inputs for bio-fuel sector in few States
- Concessional rate of BCD of 5% and exemption from ACD and SAD provided on import of various components used by a wind power plant like wind operated power plant
- Excise duty exemption provided to specified goods/ parts used for manufacture on products which may be used in a wind operated power plant
- Bio Mass
- Concessional rate of BCD of 5% and exemption from ACD provided to all items of machinery, etc. for setting up a project for generation of power or generation of compressed bio-gas
- Exemption from excise duty provided to all items of machinery, auxiliary equipment etc. for setting up a project for generation of power or generation of compressed bio-gas using nonconventional materials. The above tax exemptions/ concessions help in reducing the procurement cost incurred for setting up/ operating a renewable energy project which are pruned under the GST regime and hence substantial increase in the cost of procurements.
(ii) Increase in tax rates
Currently, different tax rates are applicable depending on the nature of procurement. For example, generic Excise duty rate is 12.5%, Service tax is 15% and VAT is 5%-14%. All such rates could be reduced/ exempted basis the actual nature of goods and purpose. GST aims to provide a single rate for goods and services which is expected to vary between 18-22%. An increase in tax rate from the current applicable rates would have an adverse impact on the renewable energy sector.
(iii) Removal of statutory forms
Currently, inter-State procurements are liable to concessional rate of CST @ 2% against issuance of statutory form (Form C). Hence, the tax cost on account of CST is limited to 2% in case of inter-State procurements for renewable energy projects. GST regime, it is expected that statutory forms would be done away. Hence, concessional rate of tax would not be available. In such case, IGST @ 20% (assumed) would be applicable on inter-State procurements. This will again increase the tax costs as compared with the current regime which would directly impact the cost of renewable energy.
BY CA. Kanika Gupta