Independent solar power producer Azure Power’s petition to Maharashtra Electricity Regulatory Commission (MERC), requesting to order Maharashtra State Power Generation Company (MSGPCL or MAHAGENCO) to compensate the company for the excess cost incurred due to Goods and Service Tax (GST) was dismissed by the commission as premature.

Azure Power had won contracts to develop and sell power from four 50 MW capacity solar projects. The solar power developer instantly filed a petition for declaratory and compensatory reliefs on account of the occurrence of ‘Change in Law’ event. The change in GST rates resulted in an increase in the effective tax rates under the GST laws from 5% to 8.9% (on gross consideration) on the composite EPC contracts with effect from January 1, 2019.

Due to the increase in GST, Azure Power was liable to pay ₹276.9 million ($39.8 million), which it expected to be compensated for by MAHAGENCO.

Maharashtra State Electricity Distribution Company (MSEDCL), the DISCOM which was supposed to procure power from MSGPCL argued that it had not signed any power purchase agreement (PPA) yet and did not agree with the demand for compensation by Azure Power. The DISCOM further stated that as the PPA was yet to be signed, it would be premature to adjudicate this matter based on the provisions of a draft PPA.

Finally, the MERC also noted that the claims related to Change in Law need to be decided based on the provisions of PPA signed between the parties. Due to the lack of a PPA, the demand from Azure Power for compensation was premature.

In its order, the commission stated:

“Under such circumstances, in the opinion of the commission, it would be premature to adjudicate this matter based on the provisions of draft PPA. Hence, the Commission finds that in the absence of any PPA between the parties, present Petition is premature”

Previously, in January 2019, the Gujarat High Court provided temporary relief to Azure Power in the matter of imposing safeguard duty on solar cells and modules imported by the company.

In a positive development for the sector, the Delhi High Court recently asked GST Council to review the newly introduced taxation formula. The court’s observation came after reviewing a petition filed by the Solar Power Developers Association (SPDA) that challenged the new tax formulation structure for solar projects. In December 2018, the GST Council, in its 31^st meeting, had given its recommendations on solar power generating projects. In the recommendation, the GST Council stated that in case of contracts of supply for solar power generating systems (SPGS), 70% of the gross value of the contract would be deemed as the value of supply of goods and attract 5% rate while the remaining 30% of the aggregate value of such EPC contract will be deemed as the value of supply of taxable service attracting standard GST rate (18%). Following the announcement of the recommendations, in January 2019, the SPDA had noted in a letter to Finance Minister Arun Jaitley that the new recommendations from the council have made the effective tax rate to be 8.9% (70% x 5 % + 30 % x 18 %), which is considerably higher when compared to the rate of 1.5 to 2% in the pre-GST era.

Responding to a petition recently, the Central Electricity Regulatory Commission (CERC) provided relief to solar project developers with regards to the effect of GST on solar projects which are still in the development phase. Renew Wind Energy (TN2) Private Limited, Phelan Energy India RJ Private Limited, ACME Jodhpur Solar Energy Private Limited, and ACME Rewa Solar Energy Private Limited had petitioned the CERC seeking relief in the matter of GST. The CERC directed that the developers’ claims be paid within 60 days of the order or from the date of submission of claims by the petitioners.