Executive summary

Multiple Indirect taxes are currently levied on transactions in India. Some of the taxes are levied and collected by the Central Government, while other taxes are collected by the State Governments. Accordingly, the current Indirect tax regime is beset by myriad problems such as complexity, tax on tax and lack of credit fungibility.

Considering the issues plaguing the current Indirect tax regime, India is gearing up to introduce a comprehensive Indirect tax regime under GST. All existing Indirect taxes, barring a select few, would be subsumed into the new GST.

Taxes on consumption or sale of electricity have been proposed to be kept outside GST. In such case, the electricity generated by renewable sources would continue to be outside the GST regime.

However, taxes on various capital goods, inputs and input services (both forming part of capital cost as well as operation & maintenance costs) used for generation of renewable energy should be subsumed in the GST regime. Taxes paid on procurements would continue to be non-creditable for the energy sector and hence, forming part of costs. Accordingly, any impact of taxes paid on procurements used in renewable energy sector would have a direct impact on cost of renewable energy Basis information available in the public domain on levy of GST, it appears that taxes on procurements for renewable energy sector would go up, which would lead to increase in cost of renewable energy (resulting in negative impact for the sector).

Further, it is imperative to note that the adverse impact of tax cost would vary from project to project (as well as from one source of renewable energy to another) based on the procurement pattern (import vs. domestic purchase) as well as extent of exemptions available currently.

Based on the exercise undertaken, the summary of impact on various types of renewable energy projects is provided below

For the bio-fuel sector also, there would be a substantial increase in prices of inputs as well as bio- fuels itself due to pruning of exemptions, removal of statutory forms and increase in rate. Further, any GST charged on bio-fuels would become a cost to the OMCs (as petrol and diesel would be outside GST unless otherwise notified).

Impact on GST on renewable energy sector

The power to legislate is engrafted under Article 246 of the Constitution of India and the various entries in the three lists of the Seventh Schedule are the ‘fields of legislation’ which provide power to the Central and State Government to govern various matters.

To enable levy of GST (which would be under a dual structure), various entries of the Constitution of India are proposed to be amended1/ modified and accordingly, various articles as well as entries of the Seventh Schedule are being subsumed and replaced by Articles enabling the GST implementation.

The power to levy taxes on consumption or sale of electricity has been provided to the State Government vide entry 53 of List II of Seventh Schedule of Constitution. However, such entry is not being subsumed and accordingly taxes on consumption or sale of electricity have been proposed to be kept outside GST. Therefore, the electricity generated by renewable sources would continue to be outside the GST regime and the State Government would have the power to continue to tax the same.

However, Entry 54 which empowers the States to levy tax on sale of goods has been subsumed as part of GST. The term ‘goods’ has been defined in the Constitution as ‘goods include all materials, commodities, and articles’. Given the wide definition of the term ‘goods’, it may be argued that electricity qualifies as ‘good’. This is also supported by judicial precedents and the fact that in various State VAT laws, electricity has been included in the category of ‘exempted goods’. Also, electricity has been mentioned in the Excise Tariff. In light of the discussions, it is possible to consider electricity as goods and accordingly, technically possible to tax electricity under GST (as sale of goods).

Currently, tax on electricity is levied only under Entry 53 and it’s specifically exempted/ excluded from levy under Entry 54.

It may be highlighted that for the purpose of this report has assumed that the same dispensation would continue (ie States would continue to tax electricity as presently under Entry 53 as this Entry has not been subsumed in GST) and that there would be no levy under GST on output electricity although Entry 54 has been subsumed in GST.