GST casting a cloud over rising ‘green energy’ sun

By Neeraj Menon and Anuja Tiwari, Trilegal
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The Indian renewable energy sector is experiencing a new-found euphoria with the central government’s keen focus on it. Given the government’s commitment to the sector and international and domestic investors’ interest, “green energy” is having a dream run. However, it is feared that the introduction of goods and services tax (GST), hailed to be the renaissance of taxation in India, could impede the sector’s growth by increasing the cost of setting up renewable energy projects by up to 20%.

Neeraj Menon
Neeraj Menon

The current indirect tax regime in India has produced a complex tax environment due to multiplicity of taxes, elaborate compliance obligations and tax cascading. To address these issues, GST, with the motto “one tax, one market”, is proposed to be introduced as a comprehensive consumption tax levied on the supply of all goods and services. GST would simplify the indirect tax regime by subsuming the majority of indirect taxes and assure a seamless credit chain by providing for cross-utilization of credits among goods and services, with minimal credit restrictions.

While the sale or consumption of renewable energy is proposed to be exempted from levy of GST, the introduction of GST is likely to result in withdrawal of various prevailing concessions and exemptions available for capital goods and input material used in setting up renewable energy projects. These withdrawals could significantly raise capital costs and consequently the cost of financing renewable energy projects.

Over the past couple of years wind and solar tariffs have seen a gradual reduction, primarily due to decreases in the cost of equipment and innovations in technology. Recent tariff orders of the state electricity regulatory commissions in Tamil Nadu and Madhya Pradesh have reduced the feed-in tariffs for solar and wind power projects for the next control periods by up to 10% from the previous periods, which, in the view of many in the industry, has left uncommissioned projects on the verge of financial unviability.

The recent solar power tariffs discovered through the competitive bidding processes under the National Solar Mission and even state bids have been extremely competitive and almost at par with conventional power prices. Some reports indicate that such low tariffs may not be solely attributable to reduced capital costs but may also be a result of aggressive bidding strategy to capture the maximum market share.

Anuja Tiwari
Anuja Tiwari

While renewable energy projects have still managed to remain sustainable and financially viable, it remains to be seen whether these aggressive tariffs have accounted for the proposed levy of GST, the rate of which is anticipated to be 12-18%. Therefore, the impact of the introduction of GST and the consequent withdrawal of existing tax concessions and exemptions on the tariffs is uncertain.

If it is as adverse as apprehended, the central government could be clouding the rising “green energy” sun. While the introduction of GST would be, by far, the single biggest indirect tax reform in India and would bring a fundamental shift in the manner in which business transactions are taxed in India, it could potentially dampen the growth of the renewable energy sector, worsen the energy crisis and adversely affect India’s climate change commitments.

“Change in law” may be contractually defined to include introduction of new taxes and any change in the nature or rate of existing taxes. To protect their financial interests under the contract, the parties usually stipulate the manner in which the effect of a change in law, upon occurrence of specified events, will be dealt with and apportioned between them. Currently, the power purchase agreements for both competitive and feed-in tariff regimes typically include change in law under the broad category of force majeure.

For force majeure events, usually relief in terms of extension of time and suspension of performance of obligations is made available to the affected party. Such relief often does not provide any pass-through of increased costs by the affected party to the other party. A contract constructed in this way may arguably fail to provide the relief of increase in tariffs due to change in law.

Further, recent tariff orders, such as that issued in Madhya Pradesh for wind power projects, categorically state that feed-in tariffs are exclusive of taxes and any change in taxes will not allow an increase in tariffs. If these provisions become the norm across other states, power producers may not be able to claim an increase in tariffs on account of levy of GST.

To ensure the continued growth of the renewable energy sector, the Ministry of New and Renewable Energy is seeking an exemption for capital goods and input materials required for setting up renewable energy projects from levy of GST. However, considering that the key objective of introducing GST is to streamline the indirect tax regime in India, even if the sector makes a fit case for such an exemption, it remains to be seen if it would be allowed.

Neeraj Menon is a partner at Trilegal and Anuja Tiwari is a counsel. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bengaluru and Hyderabad.

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