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18% tax under GST for solar modules to increase project costs: report

According to reports, the GST Council’s decision to set 18% tax rate for solar modules as compared to a present effective rate of zero will increase overall project costs by about 12%, consulting firm Bridge to India said in a note on Monday.

Bridge to India also said that the new rates would hit more than 10 gigawatt of ongoing utility scale solar power projects and pose a threat to their viability.

The firm, however, clarified that they believe long-term prospects of the industry would not be impacted by GST move as an increase in tax rates will be quickly offset by falling costs.

“A commercially viable, non-subsidy dependent sector is naturally more sustainable in the long run. However, we do wonder why solar equipment is attracting higher taxes than coal or other power equipment,” it remarked.

India has an ambitious solar power target of 100 GW by 2022. At present, India has 12.28 GW of grid connected solar power installed.

BTI highlighted that as per the final goods and services tax (GST) rates announced by the GST Council, there will be 18% tax rate for solar modules as compared to a present effective rate of zero.

“In contrast, GST rate for coal has been lowered to 5% as against current rate of 11.69% and most other renewable projects and equipment including wind mills, waste to energy plants, tidal energy plants and bio-gas plants and even solar power based devices or generating systems have been classified under the 5% rate bracket,” BTI said.

“The new regime will result in an increase of 18% in module cost, about 12% in inverter cost and 3% in all service costs – increasing overall project cost by about 12%. New rates would hit more than 10 GW of ongoing utility scale projects and pose a threat to their viability,” added the consulting firm.

The note also emphasized that the new rate structure will not give any advantage to domestic manufacturing as cost of import of raw material, including cells and wafers, will go up in the same proportion.

BTI said there was widespread expectation that solar modules would be classified under zero or 5% bracket to continue growth momentum in the sector but sharp reduction in equipment costs and solar tariffs seems to have convinced the government that the sector doesn’t need any more financial incentives.

Explaining further, BTI said, at present most states levy a 5% value added tax (VAT) on solar modules but in practice the actual tax rate levied is zero because of waiver on import duty and VAT in many states.

It also said that the union ministry of new and renewable energy (MNRE) has been assuring the industry that it will be insulated from any GST impact by passing any burden through to the offtakers.

“But we believe that this process will be complex and challenging,” BTI said, cautioning that it wouldn’t be surprising if some projects are altogether cancelled.

“It is critical for MNRE to step up and play a coordinating role with central and state regulators to ensure that the process of tariff adjustment is as smooth as possible,” it suggested.

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