India is currently experiencing a severe heatwave, with temperatures in the Delhi NCR region reaching around 50 degrees Celsius. Other states like Rajasthan, Punjab, Haryana, and Uttar Pradesh face similar conditions and have been on red alert. Meteorologists attribute these heatwaves to rising global sea temperatures and shifting climate patterns. This issue is global, with the UN noting that fossil fuel burning and greenhouse gas emissions are accelerating global warming and altering weather patterns, causing heatwaves, droughts, floods, and health problems, significantly impacting our lives . According to a recent report by the World Economic Forum, a 1-degree Celsius rise in temperature reduces global GDP by 12%, highlighting the gravity of the situation . In order to combat this situation, countries are working through initiatives such as the Paris Agreement and Conference of the Parties (COP) under the United Nations Framework Convention on Climate Change (UNFCCC) forum, with COP 28 in Dubai in 2023 seeing new commitments for cleaner energy transitions.
India, ranked as the world’s fifth-largest economy, aims to achieve a formidable target of 500 GW of renewable energy capacity by 2030 . During COP 26, the Indian Prime Minister announced an ambitious goal for the nation to attain net-zero emissions by 2070 . India has launched several key initiatives to meet this objective, including the International Solar Alliance, the Global Biofuels Alliance, the National Hydrogen Energy Mission, and the LiFE (Lifestyle for Environment) Mission. Additionally, India is implementing policies such as renewable purchase obligations and a carbon credit trading schemeiv. Given the current scenario, there is a pressing need for further measures to promote renewable energy adoption and facilitate green energy integration across diverse sectors.
GST on green energy sector:
Introduced in 2017, GST is a destination-based consumption tax designed to streamline India’s tax system by amalgamating various central and state indirect taxes, promoting the concept of ‘one nation, one tax,’ and improving business efficiency. GST plays a crucial role in supporting the Indian government’s objectives and accelerating the adoption of green energy. Notably, the GST Council has slashed rates on electric vehicles from 12% to 5% and charging stations from 18% to 5%. Furthermore, hiring electric buses with more than 12 passenger seats is exempt from GST . These adjustments aim to make green energy solutions more economically viable, facilitating the transition from conventional fuels to sustainable technologies. This policy shift has already driven a significant surge in electric vehicle sales, doubling in 2023, with projections suggesting a 66% growth in the EV market for 2024 . The upcoming Union Budget 2024 presents a pivotal opportunity for the government to implement further GST reforms that could bolster green initiatives, especially within the renewable energy sector.
Challenges in green energy sector under GST:
The renewable energy sector continues to encounter several challenges, outlined as follows:
- Higher GST rates: Elevated GST rates on goods such as electrolyser manufacturing, turbines, solar modules, etc., increases the cost, making green energy less competitive. Adjusting GST rates could make renewable energy alternatives more affordable and support broader adoption in the market.
- Valuation challenges: When a supplier provides green energy goods, along with specific services under a contract, deemed valuation provisions apply, allocating 70% of the total contract value to goods and 30% to services. This ratio has raised concerns within the renewable energy industry, leading some associations to challenge the appropriateness of the 70:30 deemed valuation.
- Uncertainty in classification of certain transactions: Ambiguity surrounds whether supplies such as solar power systems qualify as composite or mixed supplies, affecting GST rate determinations. Clear guidelines are essential to ensure transparency, resolve disputes, and streamline taxation for such transactions.
- Blockage of input tax credit: Industries, especially in renewable energy, encounter challenges with blocked input tax credits in works contracts, leading to higher costs passed on to consumers. Seamless availability of input tax credit is crucial to enhance cost efficiency and promote adopting green energy solutions.
- Inverted duty structure: GST rates on outward supplies being lower than on inward supplies lead to working capital challenges, as unutilised input tax credits are subject to refund complexities. Simplifying refund processes is essential to alleviate financial strains on taxpayers in the renewable energy sector.
- Lack of clarity on GST exemptions: Ambiguity in GST exemptions for renewable energy projects results in compliance inconsistencies and challenges for the industry, impacting operational clarity and cost management within the sector.
- Exclusion of natural gas from GST: Natural gas, being outside the GST purview, results in additional taxes such as VAT and surcharges, hindering its broader adoption despite its comparatively cleaner fuel status. Businesses’ inability to claim the input tax credit for the VAT paid on natural gas further complicates cost structures and adoption rates.
- Documentation and litigations: The renewable energy industry faces intensified tax compliance burdens and frequent transaction disputes, affecting the ease of doing business. More precise tax policies and streamlined procedures are necessary to mitigate these challenges and support industry growth effectively.
Reforms required in green energy sector under GST:
The government of India must address the abovementioned challenges to foster growth in the green energy sector. Some of the steps which can be taken are captured hereunder:
- Reducing GST rates for green alternatives: Lowering GST on green alternatives, such as hydrogen, electrolysers, turbines, solar modules, etc., to a lower rate, say, 5%, would enhance affordability and boost domestic production. Extending reduced rates to other renewable energy equipment is crucial to support sector growth effectively.
- Correction of inverted duty structure: Aligning GST rates on raw materials with finished products will lower input costs for manufacturers, encouraging local production of renewable energy equipment and components.
- Additional exemptions under GST: Introducing GST exemptions for green energy alternatives would improve affordability and promote wider adoption, supporting sustainable energy solutions nationwide.
- Incentives for domestic manufacturing: GST incentives for manufacturers of renewable energy components can stimulate the ‘Make in India’ initiative, creating employment opportunities and strengthening the domestic supply chain.
- Simplified taxation for green energy providers: Streamlining GST compliance for renewable energy providers will reduce administrative burdens, improve operational efficiency, and include clearer processes for tax credits and exemptions.
- Bringing natural gas under GST: Bringing natural gas into the GST framework would lower prices, attract investment, and transform India’s energy landscape by promoting cleaner fuel alternatives and fostering industry growth.
- Additional GST reforms: Enhancing clarity on ambiguous transactions and ensuring a smooth flow of input tax credits are critical GST reforms needed to support the renewable energy sector’s expansion and operational effectiveness.
These GST reforms would yield numerous benefits, including reducing the overall cost of renewable energy projects, enhancing their competitiveness with fossil fuels, attracting greater investment into the sector, generating employment opportunities, mitigating climate change, and improving air quality.
Other reforms in green energy sector:
In addition to GST-related reforms, various other measures are essential for advancing the renewable energy sector in India. Here are some of the key steps:
- Enhancing green hydrogen’s sectoral impact: Focus on green hydrogen for its critical role in expanding the renewable energy sector, including streamlined subsidies, climate finance access, and hydrogen-blending mandates for key industries.
- Expand in government-backed schemes: Government-backed production-linked incentive (PLI) schemes targetting renewable manufacturing and viability gap funding are indispensable measures to foster growth within the sector.
- Improving renewable sector financing: Reduced interest rates tailored for the renewables sector, complemented by innovative financing models, will enhance the capacity of manufacturers and equipment suppliers to compete effectively on a global scale.
- Promoting battery energy storage system (BESS) manufacturing hub: Boost indigenous development, facilitate technology transfer, and incentivise localised manufacturing with enhanced fiscal incentives to establish India as a BESS manufacturing and R&D hub.
- Other strategies for sustainable energy advancement: Prioritise AI-driven workforce development, bulk procurement, and energy storage advancements to improve efficiency and competitiveness, strengthen infrastructure, public-private partnerships, and regulatory frameworks to achieve cleaner and more cost-effective energy.
Conclusion
Since its inception, GST has revolutionised transaction frameworks within the renewable energy sector, playing a crucial role in catalysing growth, attracting investments, and stimulating innovation. Implementing a transparent and standardised tax regime under GST promises to lower operational costs, enhance competitiveness, and increase the appeal of renewable energy projects to investors. However, integrating GST into this sector continues to be an ongoing process requiring proactive adjustments. Despite its complexities, a well-structured and effectively managed GST framework promotes operational efficiency and ensures compliance, aligning closely with India’s sustainable energy objectives.
Bold reforms and a supportive regulatory environment are essential to effectively tackle current challenges. Strategic reforms aimed at empowering the renewable energy sector have the potential to unlock its full economic potential, fostering accelerated growth and advancing India towards a sustainable future. The upcoming Union Budget 2024 presents a pivotal opportunity for the Indian government to reaffirm its commitment to renewable energy through targeted reforms. Addressing existing challenges and creating an enabling fiscal environment can significantly bolster growth in the renewable energy sector, paving the way for a resilient and sustainable future.
(With inputs from Sanyam Narang, Consultant, Grant Thornton Bharat LLP)
This article first appeared in Taxmann on 25 June 2024.
