The present system of tax in the country has myriad complications. Multiple indirect taxes are levied on most transactions in India. Taxes are also subdivided into those collected by the Central Government and those collected by the states. Individuals and businesses get taxed at several stages of the consumption and income cycle. Many taxes are hidden in manufacturing or selling costs and cannot be seen transparently. The current tax regime is beset with complexity, tax on tax and lack of fungible credit.
Responding to these issues, the Parliament has just unanimously passed the Goods and Services Tax Bill, officially known as the Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 (“GST Bill”). The GST aims to radically overhaul India’s tax system by replacing national, state, and local taxes with a new unified value-added tax. GST is expected to improve the ease of doing business, make India more competitive, attract foreign direct investment and increase the GDP of the country by between 1.5 to 2 percentage points. It is to be implemented on 1 April 2017.
The GST regime is not free of problems. With this new GST Bill, the Government seeks to remove all existing indirect taxes, barring a select few such as taxes on the consumption and sale of electricity. In such cases, the electricity generated by renewable sources would continue to be outside the GST regime. This is presumably done to keep the cost of renewable energy low. However, even though the renewable energy sector is exempt from the GST regime, the products that go into the manufacturing of, say, solar panels would still be taxed.
Taxes on various goods and services that form a part of capital operation as well as maintenance costs used to generate renewable energy would be subsumed in the GST regime. Taxes that are paid on procurement of these goods and services would continue to be non-creditable for the energy sector and thus increase the cost of production. Based on the report on GST by the Ministry of New and Renewable Energy, it is expected that the taxes on the procurement of goods and services would go up. This would result in a negative impact on the sector. Additionally, the tax would vary from one source of renewable energy to another based on where the goods are procured from, the number of imported goods used in the manufacturing process and the extent of exemptions that are currently available. The more the exemptions, the greater would be the impact once the GST regime unifies the process.
Prima facie there are three problems in the GST Bill that are likely to affect the renewable energy sector. First, the present regime provides for various exemptions that are provided to the goods and services used in the manufacturing of renewable energy. The GST, however, is determined to trim the exemptions. Second, taxes will increase in the GST regime. Currently, different taxes are applicable for different goods, thereby positively affecting some renewable energy sources over other renewable or non-renewable sources of energy. GST aims to provide for a single rate for all the goods. The Select Committee of Rajya Sabha has recommended that the standard GST rate not exceed 20 per cent. This would have a considerable impact on the tax cost burden for the renewable sector that until now has thrived because of no taxes. Lastly, the GST Bill removes statutory forms. At present, a concession of 2 per cent is granted on the Central Sales Tax against issuance of a Statutory Form C, where goods are to be used in the generation or distribution of electricity. The GST Regime plans to do away with these statutory forms in the name of streamlining the process. GST is expected to be levied on all the inter-State supplies. Hence, the concessional rate of tax may not be available. To make things worse, the Integrated Goods and Services Tax at 20 per cent would be applicable on inter-State procurements.
The proposed GST regime is thus proving to be a nightmare for the energy sector. If the GST is not amended, the cost of production of renewable energy will skyrocket, as a study by the Ministry of New and Renewable Energy depicts:
Table depicting the approximate increase in cost due to the GST regime.
This is inconsistent with the commitment of the Modi Government to increase production of renewable energy in India, as was boasted by the Prime Minister at the Paris Summit just last year. The current tax exemptions provided to the renewable energy sector should be continued under the GST regime. Exemptions should be provided for categories of goods and services that are supplied to a renewable energy project. Goods and services to a renewable energy project should not be taxed. In instances where exemptions cannot be granted, a concessional rate of GST (both at Central and State level) should be applicable to counter the negative investor confidence sparked by the GST Bill.
A simple way to arrive at taxes incurred on inputs consumed by the renewable energy industry would be the input-output method. The industry would be required to submit a cost sheet of each renewable energy product manufactured and this sheet would list details of the tax burden. Since the industry manufactures similar items like transformers, converters, switches and panels, the incidence of tax for each firm may not vary much and a grouping could be done. Credits could be used to compensate for tax to be paid on any other product and a sort of virtual tax credit and debit balance passbook could be created for such firms. An early solution needs to be found and defined while framing rules, so that the renewables industry is not unintentionally burdened.