The setting up of a renewable energy system involves the supply of goods and services for commissioning, erection and installation of infrastructure.
Under the erstwhile Indirect Tax regime, various tax concessions/exemptions were made available to Renewable Power Projects both at the Central and state levels. Under Goods & Services Tax (GST) too, similar tax concessions continue for this sector, providing for a concessional GST rate of 5 per cent on supply of renewable energy devices and parts.
While it was expected that GST would simplify the tax structure and the woes of ‘Works Contracts’ would be taken care of, unfortunately things did not turn out that way. Project developers got confused, as there were contradictory Advance Rulings on the subject, treating projects as ‘works contracts’ attracting GST of 18 per cent.
On 31 December 2018, the Government, through a Notification (27/2018), amended the law to provide that if renewable energy devices were supplied along with supply of other goods and taxable services in relation to their setting up, then 70 per cent of the gross consideration would be deemed as ‘value of supply of goods’ attracting GST of 5% and the remaining 30 per cent would be ‘value of services’ (attracting GST of 18%).
While the Government’s intention has been to simplify the tax structure for renewable energy sector, the following are a few open-ended issues.
§ Whether the deemed ratio of 70:30 depicts the industry average
While there was a confusion on GST applicability on setting up of renewable energy devices, this notification was issued to rationalize the GST on supply of goods and services. However, being aggrieved by the deemed ratio, the Indian Wind Turbine Manufacturers’ Association (Association)approached the Hon’ble Delhi High Court, which directed the GST Council to re-evaluate the prescribed tax structure of such projects.
The key submission made by the association was that the proportion of ‘goods’ in a Power Project was significantly higher than 70 per cent and hence the ratio should be re-considered.
§ Whether the said valuation is applicable only in case of single indivisible contracts ?
Typically, in setting up renewable power projects, contracts/agreements are awarded to a single contractor to carry out the complete supply of goods along with services, at a lump-sum price (with or without a break-up) or individual contracts for goods, services, civil works, etc.
Whether a contract is to be regarded as a single indivisible contract or divisible contract has been a matter of dispute from the pre-GST era, particularly to determine whether the same is a Works Contract or not. Courts have passed divergent rulings depending upon the facts/circumstances of these cases. Now, similar anomalies continue in the GST regime since a works contract is treated as a deemed service attracting GST of 18 per cent.
The notification is silent about the treatment depending on whether supplies are made under one contract or separate contracts. A Press Release dated 22 December 2018 issued by the GST Council however refers its applicability to EPC contracts, leaving room for ambiguity.
§ Other issues
Apart from the above, there are some unanswered questions. Like in an ongoing contract where invoices have already been raised based on actual supplies at multiple rates, whether these are to be aligned in the 70:30 ratio.
Furthermore, whether there exists an option to discharge tax on actual value. While the methodology to justify actual cost based on the documentation may face its own challenges, whether an assessee can at all explore such an option needs to be addressed.
The renewable energy sector has the potential to accelerate and address India’s electricity/energy needs considering the present situation, which entails shortages in coal supply, acute power failures, high level of distribution loss and air pollution caused by diesel generators, etc. The Ministry of Energy, along with expert groups/associations, is extensively working to develop this energy source with a goal of attaining 175 Gigawatt of renewable energy by 2022 [i]1
Hence, considering the criticality of this sector, the Government had kept it in a lower tax bracket of 5%GST. Now, with this ratio of 70:30, the effective tax rate comes to around 8.90 per cent. The prices quoted by project developers are generally based on thin margins in order to be competitive in winning projects from Independent Power Producers (IPPs). Another important point is that the buyer is not able to claim any input tax credit of GST since electricity is beyond the purview of GST. Therefore, it will add to the cost and get passed on to the customer.
Under the GST regime, the Government has been receptive in hearing industry demands and has rationalised/lowered tax rates on various products occasionally. Considering the current economic scenario, however, one must equally appreciate the Government’s concern that any cut in tax rates now may adversely impact its revenue collections. The sector would be delighted if the Government adopts an approach whereby their concerns are addressed, clearly focussing on the larger benefit of renewable energy generation.
-This article has been supported by Mr. Abhishek Agarwal, Chartered Accountant
(A version of this article appeared in GSTSutra on November 25,2019)