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					</table>The renewable energy sector is experiencing unprecedented growth fueled by environmental concerns and technological advancements. Countries are increasingly prioritizing sustainability, leading to the rapid adoption of clean energy sources like solar, wind, and hydropower. Falling renewable technology costs are making it economically competitive.
India exemplifies this trend, aiming to <a href="https://www.mercomindia.com/india-become-carbon-neutral-2070" target="_blank" rel="noopener">install</a> 500 GW of power generation capacity from non-fossil fuels by 2030.
The dynamic growth of renewable energy presents distinct tax challenges in India, where the Goods and Services Tax (GST) intricacies impact the sector. The complexity of this system poses challenges for businesses operating in renewable energy, requiring a closer look at GST in this context on both the output and input sides.
While GST does not apply to electricity, supplies related to the renewable energy sector are subject to GST, impacting project cost structures. Previous tax exemptions aimed at promoting clean energy have evolved under the GST regime, maintaining reduced rates for renewable energy equipment. The implementation journey, particularly for solar power generating system (SPGS) supplies, has faced challenges and fluctuations.
Companies in the renewable energy sector and or providing engineering, procurement, and construction (EPC) services can focus on the following for effective tax structuring and administration:
EPC Contracts
Taxation for renewable energy projects faces a key challenge with the prevalent EPC approach. Under GST legislation, EPC contracts involving a composite supply resulting in immovable property are deemed works contracts subject to an 18% GST rate. This classification can impact project cost structures significantly, necessitating effective tax liability management.
Transaction Structures and GST Optimization
Various transaction structures have evolved to optimize GST applicability in power generation, aiming to minimize costs. A strategy involving separate contracts for goods and services helps companies reduce the GST rate below the 70:30 ratio stipulated by legislation. However, a recent trend limits concessional rate benefits to supplies under Chapters 84, 85, and 94 of the GST Tariff Act, particularly for renewable energy projects. These challenges underscore the dynamic nature of tax planning in the renewable energy sector, emphasizing the importance for businesses to stay updated and compliant with evolving GST provisions.
GST Valuation Mechanism
The government introduced a valuation mechanism to alleviate high taxes on renewable energy supplies, applying a 5% GST on 70% of the total contract value as goods and an 18% GST on services. However, the concessional GST rate for solar power generating systems increased to 12% from October 2021, raising concerns in the renewable energy sector particularly impacting solar project costs.
Ambiguity in GST Rates
The demarcation of GST rates for renewable energy supplies took effect on January 1, 2019, causing ambiguity for the interim period from July 1, 2017, to December 31, 2018. Circular 163/19/2021-GST, dated October 6, 2021, clarified that for this period, GST on specified renewable energy projects could be paid based on the 70:30 ratio for goods and services, similar to the prescribed ratio starting from January 1, 2019.
Lack of Precise Definitions
A persistent challenge in the GST regime for the renewable energy sector is the lack of precise definitions, causing uncertainty. The absence of clear criteria for devices in lower tax brackets can lead to varied interpretations. A recent Madhya Pradesh High Court ruling under the value-added tax (VAT) regime clarified that all goods related to power evacuation and transformation from renewable sources qualify for benefits. Despite this precedent, achieving similar clarity within the GST regime is essential, particularly with the introduction of new taxes and potential interpretations limiting benefits to power generation systems rather than subsequent processes.
Changing GST Rates and Terminology
In the 45th GST Council Meeting on September 17, 2021, a proposal to <a href="https://www.mercomindia.com/developers-worried-gst-hike-solar-modules" target="_blank" rel="noopener">increase</a> the GST rate from 5% to 12% for specified renewable energy devices and parts was made. This led to a change in terminology from &#8216;Solar Power Generating System&#8217; to &#8216;Solar Power Generator&#8217; (SPG), creating ambiguity in the exact definition of an &#8216;SPG&#8217; due to the lack of an industry standard. The absence of explicit guidance on components encompassed within the SPG category further complicates matters. While a straightforward interpretation includes all components converting solar energy into electricity, the crucial factor lies in authorities&#8217; interpretation and application of this change.
Composite Supplies vs Mixed Supply
Some transaction structures assert that supplies for SPGS/SPG in renewable energy projects are composite supplies, with the primary supply being solar modules subject to a 5% or 12% GST rate. However, a concern arises as this structure could be treated as mixed supplies, attracting a higher 18% GST rate. This distinction between composite and mixed supplies adds complexity to the GST landscape in the renewable energy sector, requiring businesses to structure contracts and documentation meticulously for desired tax treatment.
Documentation and Compliance
In audits or assessments, businesses must substantiate their chosen GST optimization structure, aligning documentation with actual implementation for compliance and to prevent issues during inspections.
The article highlights the intricate relationship between the GST regime and India&#8217;s renewable energy sector. Evolving transaction structures and the quest for tax optimization emphasize the need to align documentation with practical implementation, particularly in the context of solar power generators and components.
Timely resolution of tax issues is vital for &#8216;Make in India&#8217; and &#8216;ease of doing business&#8217; initiatives, supporting India&#8217;s global aspiration to lead in renewable energy. Swift resolution fosters the nation&#8217;s achievement of renewable energy targets, promoting economic growth and securing a prominent position in the global clean energy arena. As the sector expands, stakeholders must adapt to changing GST regulations and capitalize on opportunities for sustainable growth.
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Authors Hardik Shah (Director) and Dhrumil Shah (Deputy manager) are tax experts at Deloitte Haskins &amp; Sells LLP (DHS)

Navigating GST Challenges in Renewables: Balancing Planning and Execution

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					</table>India has millions of Micro, Small, and Medium Enterprises (MSMEs), which are the growth engine of its economy and represent the nation&#8217;s entrepreneurial spirit.
Power is one of the largest components in the input cost of an MSME, and given the availability of sunshine across the country, going solar is an ideal way to reduce operating costs and hedge long-term electricity inflation.
Over the years, falling costs of solar, tax incentives, and <a href="https://mercomindia.com/emi-rooftop-solar-savings-on-power-costs-tata-power/" target="_blank" rel="noopener">increased awareness</a> have resulted in rooftop solar growth in MSMEs, but there has not been a radical uptake. Despite the tremendous potential, scaling <a href="https://mercomindia.com/product/rooftop-solar-market-report-q3-2022/" target="_blank" rel="noopener">rooftop solar</a> has been challenging due to multiple reasons. One such challenge that&#8217;s less discussed is customer acquisition strategy.
In this multi-part series, I would share some of the learnings from my travels <a href="https://mercomindia.com/renewable-experts-decode-ways-for-green-at-mercom-indias-event/" target="_blank" rel="noopener">selling solar to MSMEs</a> across India. In a diverse and complex country, it is imperative to understand the cultural and business nuance at the last mile.
Critical Drivers
Two critical drivers support MSME solar adoption. The first is the obvious &#8211; <a href="https://mercomindia.com/here-is-how-much-businesses-are-saving-from-installing-solar/" target="_blank" rel="noopener">cost savings</a>. It is critical to map which states and industries have the highest C&amp;I tariffs, but it is also important to determine the net savings on the electricity bill after solar has been deployed.
If the net savings on the bill, after paying the EMI, are less than 5-7%, the hassle of solar and the risk of damaging the roof far outweigh the incremental savings. The accelerated depreciation tax benefit is also not seen as a major driver.
MSMEs regularly buy equipment and have a good understanding of depreciation. Net electricity bill savings have to be large enough to garner interest.
A major non-financial driver to consider is if your customer is an <a href="https://mercomindia.com/eus-carbon-deal-accelerate-exporters-transition-renewables/" target="_blank" rel="noopener">exporting entity</a> or one that is selling to a large Indian / international player, which has to measure Scope 3 emissions.
In the pursuit of decarbonization, large corporates are mandated to work on their Scope 3 emissions through their supply chain. It is not uncommon for a large international buyer to visit the MSME to check for quality and safety standards but also check for green and climate-friendly practices.
Approach 
According to the MSME ministry, India has over 400 industrial clusters, and they are the best place to launch your go-to-market strategy. This is because factories are geographically close to each other. They may be a single industry cluster like Chakan, Pune (Auto and Auto Ancillaries), or multiple industry clusters like Tarapur in Boisar (Chemicals, Textiles, Steel).
The buy-in from the local industrial association will be critical to amplify your offering. Awareness events at these associations – with chai, samosa, and biscuits – are the best way to get in front of customers and then get invited for a one-on-one meeting at the factory. A lot of business happens over chai in this country.
Please study the health of the industry before approaching the cluster. I once made a trip to Chittorgarh only to realize that the marble industry was reeling with headwinds from demonetization and 28% goods and services tax (GST).
It helps to have a grasp on the energy situation in the cluster – sometimes the power distribution company’s (DISCOM) office is in the cluster itself, and you will get a first-hand understanding of the last mile efficiency for changing meters and any other permissions.
It is highly likely that SMEs will not purchase the equipment outright and will ask for financing and have some options ready. A large cluster would usually have a small branch office of a public sector bank – meeting the branch manager there will also give a sense of the business activity in the cluster.
Don&#8217;t miss the nuance
Many of the customers will be family-run businesses; hence, it will be critical to quickly ascertain who the decision maker is. In these firms, the promoter looks at the finances but depends heavily on the opinion of their chartered accountant, who might act as a gatekeeper.
Having the required numbers ready will help in moving through the sales process quickly. Communication will more likely happen on WhatsApp rather than email and in the regional language rather than English. It&#8217;s essential to find someone who speaks the local language, ideally from the same area.
The real India moves at a slower pace than the big city rush. Constant follow-ups are not required, after a point, let the magic unfold – solar is important for an industrial customer, if they trust you and if the need arises, the customer will themselves find a way to reach you.
In the following parts of this series, we travel to different parts of India and look at specific industrial states and clusters where I have had the joy of having very sweet chais.
Mercom India&#8217;s C&amp;I event series is targeted to get solar service providers in front of C&amp;I consumers throughout India. Find out more <a href="https://mercomindia.com/event/" target="_blank" rel="noopener">here</a>.
(Author: Sishir Garemella, Founder Sunvest and Head of International Business Development for PV Evolution Labs. More articles in the series will follow. Watch this space.) 
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How to Convince India’s MSMEs to Go Solar

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