New Delhi: The solar industry is headed for a legal battle as the ruling that set the goods and services tax (GST) rate for solar power projects at 18% has come as a dampener for the industry already facing import duty on solar panels.

Maharashtra’s appellate authority for advance ruling (AAAR) on 5 September set 18% as GST on solar projects, endorsing an earlier ruling by the state-level authority for advance ruling (AAR) and dismissing solar developers' demand to be taxed at a lower 5%. Previously, the AAR in Rajasthan too had declared 18% as the GST rate for solar projects.

The matter appears headed for a prolonged legal battle, unless the government steps in to clarify the taxation of solar power projects. A higher project cost could reflect in tariffs that developers offer in auctions to win projects.

With electricity kept out of GST, the higher tax rate on solar projects becomes a cost for the producers, inflating the final price of solar power. The safeguard duty on imported solar panels to support domestic industry has added to the uncertainty. Solar panels, which constitute 60-70% of the cost of solar projects, are taxed at 5% GST.

However, the AARs have held that the setting up of solar projects are classified as work contracts as they consist of supply of goods and services packaged into an immovable property. Therefore, these projects are liable to be taxed at the 18% rate that applies to work contracts. In the pre-GST era, only a small part of the total project cost, about a tenth, was covered by a service tax of 15%.The net tax effect on the solar power industry in a pre-GST regime was less than 5%, a reflection of the tax breaks it enjoyed across excise and value-added tax.

Under GST, solar power projects need to pay higher tax despite the National Democratic Alliance’s (NDA’s) focused approach to promote solar power. The industry has sought government intervention to lower the tax burden on such projects.

“A general consensus among various GST advance ruling authorities of 18% rate of GST on solar power projects is an aspect of worry for solar industry players who believe that a 5% tax should be applicable," said Abhishek Jain, tax partner, EY India.

“To end apprehension, the government should consider issuing an explicit clarification on the rate of tax applicable to such projects," he said.

India is targeting 100 gigawatts (GW) of solar power capacity by 2022, up from the 23GW at present. The country has a total renewable power generation capacity of over 70GW currently, half of which comes from wind power.

Intense competition in recent years has driven down solar power tariff discovered in project auctions. The factors that helped producers bid for projects aggressively using measures including lower prices of imported solar panels and efficient financial structuring of projects.

Industry observers said global developments such as China limiting solar capacity addition making more panels available for imports are helping counter-balance cost pressures building up in the country. “The solar industry is facing upward cost pressure locally from taxes and financing, but that is getting balanced by lower equipment costs due to global developments. So, for now, project profitability is secure," said Kameswara Rao, partner, Grid, PwC India.

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