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 install 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 increase the GST rate from 5% to 12% for specified renewable energy devices and parts was made. This led to a change in terminology from ‘Solar Power Generating System’ to ‘Solar Power Generator’ (SPG), creating ambiguity in the exact definition of an ‘SPG’ 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’ 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’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 ‘Make in India’ and ‘ease of doing business’ initiatives, supporting India’s global aspiration to lead in renewable energy. Swift resolution fosters the nation’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.

 

Authors Hardik Shah (Director) and Dhrumil Shah (Deputy manager) are tax experts at Deloitte Haskins & Sells LLP (DHS)