An Alumnus of IIM and DU with almost a decade of experience in the banking and finance sectors. I had the opportunity to work with all types of institutions in BFSI ecosystem like Bank, NBFC, Fintech, Consulting and Auditor. I started my professional journey at KPMG and subsequently worked in leading names of the BFSI sector including Ujjivan Bank, Vistaar Finance. Currently building a fintech startup ( PICE) by handling alliances, compliance and creation of GTM strategy for payments and credit product.
GST unified India's tax structure, improving logistics and reducing cascading taxes in the energy sector.
While renewable energy devices attract a low 5% GST, related services face an 18% tax, inflating project costs.
The exclusion of electricity and petroleum from GST limits full benefits for the power sector.
Long-term EPC contracts and PPAs face uncertainty due to increased costs and insufficient tax adjustment clauses.
Despite challenges, GST has simplified compliance and enabled input tax credit benefits, enhancing long-term efficiency.
The introduction of GST marked a significant overhaul of the country's indirect taxation system. GST aimed to streamline tax administration and foster a common national market by subsuming various central and state taxes into a unified tax regime.
While the energy sector anticipated benefits from this reform, the reality has been complex. The renewable energy segment has particularly grappled with increased costs and regulatory ambiguities.
This article delves into the multifaceted impact of GST on power sector and other energy sector of India, with a focus on renewable energy, EPC contracts, and power purchase agreements.
GST and its Objective
GST was envisioned to eliminate the cascading effect of different indirect taxes, enhance compliance, and unify the Indian market. For the energy sector, it promised clarity in taxation, reduced project costs through input tax credits, and a predictable tax environment conducive to investment.
However, the sector's unique characteristics, such as long-term contracts and capital-intensive projects, have led to challenges adapting to the new tax regime.
Influence of GST on Energy Sector
GST has enhanced supply chain efficiency by eliminating tax barriers, which positively impacts the power sector through faster procurement of equipment and materials. Unified taxation simplifies logistics for power projects across states. However, increased compliance requirements and reduced exemptions pose cost challenges for renewable energy developers and EPC contractors.
GST tariff on Renewable Energy
The following table gives information regarding GST tariffs on clean energy:
Commodities Name
GST Rates
Renewable energy devices
5%
Parts for their manufacture (solar power-based devices, solar power generating system (SGPS), biogas plant, etc) [falling under chapter 84, 85 or 94 of the tariff]
Other equipment being used in such plants is attracting GST
Commodities Not under GST
Some power sector products are not included in the GST tax slab. They are taxed under the old tax regime, such as VAT, excise duty, and more. These items include petroleum products (such as petrol and diesel) and the supply of electricity.
The non-inclusion of certain products, like petroleum and electricity, under GST taxation results in various challenges for the power sector. Overall, the impact of GST on the power sector can be positive if these commodities are included in the GST tax regime, which the government is planning to do soon. A significant impact of GST on the power sector includes the increase in capital cost in energy projects.
Dismissal of a Concessional Rate for Inter-State Procurement for EPC Contracts
Before GST, projects in the energy sector enjoyed several exemptions and concessions. Now, it is unclear whether these benefits will be included in the new GST regime, which results in increased costs for projects in the power sector.
One such example is the special 2% concessional rate. Companies involved in power projects could claim a 2% concession rate on their interstate purchases. This would result in the companies spreading their purchases across various states, leading to project cost reductions. Currently, this is one negative impact of GST on the power sector.
Impact of GST on Renewable or Sustainable Energy
During the pre-GST regime, the government waived off 5% VAT for renewable energy companies in many states. Moreover, authorities also excluded the excise duty on commodities in the clean energy section of the power sector. This encouraged the use and production of renewable energy more than non-renewable energy.
In GST, taxation rates on renewable energy products remain low; however, services still attract an 18% tax rate. This leads to a negative impact of GST on the power sector in the form of increased costs due to higher charges paid on sustainable energy currently compared to the past.
Who Will Bear the Extra Cost?
Power generation companies may try to pass GST costs to buyers, but contracts and market conditions limit this. Moreover, if the prices of companies' consumers are increased, the process of claiming input credit remains confusing.
DISCOMs (Distribution Companies) don't want to pay more, especially with their surplus supply. Therefore, the short-term impact of GST on power sector might hurt the profits of the production companies even more. However, the cost of energy production may stabilize as equipment prices drop.
What are the Drawbacks under Existing Power Purchase Agreements?
Power Purchase Agreements (PPAs) are long-term contracts between power producers and buyers, like DISCOMs. These contracts typically include the cost of existing taxes in the agreed-upon price of electricity. Most PPAs also have clauses that allow adjustments if tax laws change.
These adjustments are usually covered under 'Change in Law' or 'Force Majeure'. GST is a 'Change in Law' clause allowing price revisions if government laws change.
Not all PPAs include proper clauses to adjust for new or increased taxes. In these cases, the impact of GST on the power sector leads to the producer bearing the extra cost. This means the price of the project increases, but revenue remains the same, leading to financial losses.
Before GST, workers' contracts in EPC projects were often confused. Even when contractors split these elements into separate agreements, authorities often treated them as composite works contracts, especially if clauses like cross-liability or wrap agreements were included. This led to frequent disputes and complications in tax assessment.
The consideration of workers' contracts as services has led to a uniform rate and has a positive impact on the power sector. By classifying all works contracts as services, GST ensures a consistent tax rate on the total contract value. This simplifies compliance, reduces ambiguity, and lowers the risk of litigation over tax treatment.
The government has replaced the central sales tax companies had to pay on interstate purchases with the uniform rates of GST, on which they can claim credit. Under the old regime, companies faced CST as a non-creditable cost that increased the overall cost of the project.
The system taxes interstate purchases with GST, allowing contractors to claim input tax credits. This adds to the benefits for businesses as it eliminates cascading taxes and improves cost efficiency in energy sector projects.
Conclusion
Overall, implementing GST has brought opportunities and challenges to India's energy sector. The impact of GST on power sector includes higher tariffs and financial pressure. While it aims to create a unified tax structure, its implementation has increased costs for renewable energy projects, potentially hindering the country's clean energy goals.
Addressing these challenges through policy interventions, stakeholder engagement, and contractual adjustments is crucial to ensure the sustainable growth of the power sector in the GST era.
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FAQs
How has GST impacted the renewable energy sector in India?
GST has had a mixed impact on renewable energy. While the 5% GST rate on renewable energy devices is relatively low, services like EPC (Engineering, Procurement, and Construction) contracts are taxed at 18%, increasing overall project costs. Earlier VAT and excise exemptions are no longer available, leading to higher financial burdens. These cost escalations may slow down the pace of green energy adoption unless addressed through policy reforms.
Are petroleum products and electricity included under GST?
No, key energy commodities like petroleum products (e.g., petrol, diesel) and electricity are currently excluded from GST and continue to be taxed under legacy systems like VAT and excise duty. This creates inefficiencies and prevents companies from claiming input tax credits on these items. Including them under GST in the future could streamline taxation and reduce energy costs.
What happened to the 2% concessional rate under GST for power projects?
Prior to GST, power project developers could avail a 2% concessional tax rate on inter-state purchases, which helped reduce project costs. However, this benefit was not explicitly carried over into the GST regime. The uncertainty around such concessions has raised the cost of equipment procurement and added to budget pressures for energy infrastructure projects.
How are Power Purchase Agreements (PPAs) affected by GST?
Many PPAs were signed before GST came into effect and may not contain clear clauses for tax adjustments. While GST qualifies as a ‘Change in Law’ under most PPAs, implementation varies. Where clauses are vague or absent, developers may struggle to recover added GST-related costs, affecting profitability. Future PPAs now typically include better-defined tax revision terms.
What are the long-term benefits of GST for the energy sector?
In the long term, GST improves supply chain efficiency and tax credit availability, especially for inter-state transactions. It reduces the cascading tax effect, brings clarity to the tax treatment of composite contracts, and helps avoid legal disputes. Over time, these efficiencies are expected to enhance cost-effectiveness and investment attractiveness in the energy sector, especially if more products are brought under the GST umbrella.
An Alumnus of IIM and DU with almost a decade of experience in the banking and finance sectors. I had the opportunity to work with all types of institutions in BFSI ecosystem like Bank, NBFC, Fintech, Consulting and Auditor. I started my professional journey at KPMG and subsequently worked in leading names of the BFSI sector including Ujjivan Bank, Vistaar Finance. Currently building a fintech startup ( PICE) by handling alliances, compliance and creation of GTM strategy for payments and credit product.
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