The GST council, in September 2021, announced the GST increase for ‘specified renewable energy parts,’ from 5% to 12%, which came into effect the following month.

With the rising ambiguity around managing the project costs with the increase in the GST rate, many developers have raised their concern to the government, requesting an immediate solution.

It is in the realm of speculation that the Ministry of Finance might consider revising the GST rates or make it limited to only ‘renewable power generating systems’ since electricity is outside the ambit of GST.

The increase in GST rate is aimed to address the issue of inverted duty structure for solar cell and module manufacturers to make them competitive. In an inverted tax structure, the tax rate on inputs used is higher than the tax rate on the outputs for sale.

With the increase in GST from 5% to 12% on renewable energy equipment, at the project level, the new effective rate of GST on wind and solar power comes to around 13.8%.

The confusion is around the use of the word ‘solar power generating systems,’ which was all-encompassing and included solar power projects. The term ‘solar power generator’ in the new notification is restrictive in nature.

The stakeholders believe that the increase in GST is only on solar energy equipment and is not intended to increase the GST rates any further. Clarity from the government is sorely needed on this topic. Under the existing regime, 70% of the gross value of the contract was considered for the supply of goods, attracting a 5% rate – which is now 12%.

This is in the case of a contract of supply for solar power generating systems. The remaining 30% is for the supply of taxable services, attracting a GST rate of 18%.

Speaking to Mercom, a top executive from one of the leading developers, said, “The government can increase the GST on modules, but projects must not suffer. The suggested rate was 70% of the project cost at 5% GST and 30% of the project cost at 18% GST. At the project level, it is recommended to keep the same formula. Now the GST rate is 12% on the solar power generator, and there is no clarity on the rest. So, what is meant by solar power generator – module or project? And then, the rest of the components will have their respective GST rates – inverters at 18%, cables at 28%, and so on.”

With global solar supply chain disruptions, a rise in the price of components, and various other challenges, the solar sector is already facing a tough environment, and the increase in GST rates is expected to exacerbate the problem further. Confusion around taxes and unexpected increases has always spooked international investors who are crucial to help fund the renewable aspirations of the country.

The increase in the GST rate will affect the economic feasibility of renewable energy projects and will have a detrimental effect on the ongoing and upcoming projects. Though the developers can always claim compensation under the ‘Change in Law’ clause, they don’t want to get into the legal quagmire as GST claims have taken years to get resolved in the past.

With the Basic Customs Duty (BCD) implementation right around the corner, the developers are hoping GST will not make projects more expensive while the industry is pushing hard to meet the renewable energy target set for the country.

The solar industry has been asking for clarity around the GST rates for years.

The average cost of large-scale solar projects in the third quarter of 2021 (Q3 2021) was about ₹42.4 million (~$559,828)/MW, according to Mercom’s Q3 2021 India Solar Market Update. The cost increased by 23% compared to the same period last year when it was ₹34.5 million (~$455,322)/MW.