Thursday, 23 June 2016

GST AND GISPS: FRIENDS OR FOES?


THIS IS A PROPRIETARY ARTICLE OF PRAVEG COMMUNICATIONS LIMITED, AHMEDABAD. REPRODUCED IN THE BLOG WITH ACKNOWLEDGEMENT.


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With India getting ready to roll out GST (Goods And Services Tax), its quite essential to study its impact on India's most attractive sector i.e. Renewable Energy. With India aiming to generate 100 GW of Solar Power by 2022 (including a substantial from Grid Interactive Solar Power System Projects or GISPS), will GST in its proposed structure be an impediment or positive experiment? Answer lies below. 

CURRENT SYSTEM
Currently, the Constitution of India provides for the following structure of indirect taxation in India (i) excise duty on manufacturing of commodities levied by Central Government (source based); (ii) service tax on provision of services levied by Central Government (source based); (iii) central sales tax on inter-state sale of goods levied by Central Government but collected by exporting state government (source based); (iv) state sales tax/VAT on intra-state sale of goods by respective state governments (local jurisdiction base); (v) state tax on entry of goods in the particular state by respective states (destination based); (vi) other minor state taxes like entertainment tax, luxury tax etc.
Given this structure, when a commodity is manufactured, the inputs are already first taxed and the outputs are taxed again. By way of example, excise/customs duty paid at the stage of manufacture is not available for credit for the traders and vice-versa. Further, credit of taxes paid in one state cannot be availed in another state. SO THE INPUT TAX NOT AVAILABLE FOR CREDIT BECOMES PART OF COST WHICH END CONSUMER NEEDS TO BEAR.
SYSTEM AFTER GST
Per the draft GST bill, the tax will be imposed in the following manner: (i) CGST[1] (to be collected by Central Government) and SGST[2] (to be collected by State Government) on Intra-State Transactions; (ii) IGST[3] (to be collected by the Central Government) on Inter-State Transactions; (iii) BCD and IGST[4] (to be collected by Central Government) on import transactions.
The main feature of GST is to ensure seamless availability of input tax credit in the supply chain and destination based taxation. For intra-state transactions the following credits will be allowed: (i) input tax credit of CGST for output CGST liability; and (ii) input tax credit of SGST for output SGST liability. Cross utilization of credit is not allowed however. For inter-state transactions, credit will be allowed in the following manner: (i) seller selling goods inter-state will pay IGST after adjusting IGST, CGST and SGST on the inputs; and (ii) the dealer in the receiving state will claim IGST credit while discharging CGST and SGST towards output.


RENEWABLE ENERGY UNDER GST REGIME


Entry 54, List II, Seventh Schedule of the Constitution of India allows state to levy tax on sale/purchase of goods[1]. The constitutional amendment bill[2] which seeks to bring GST in to life has substituted this entry 54[3]. The same List II also has another entry 53 which is on the tax on consumption of electricity under which state governments impose electricity duty (normally added as a component in our power bill). This entry is not subsumed/substituted under GST.
Currently both solar grid-connected and off-grid projects enjoy a number of benefits through notified exemptions. For example, capital goods required for establishment of solar projects enjoy 5% BCD and no ACD[4]. Solar cells (whether or not assembled in panels) enjoy 0% BCD[5]. Capital goods required for establishment of solar projects enjoy 0% SAD[6]. Capital goods required for establishment of solar projects enjoy 0% Excise Duty[7]. Solar PV panels, inverters enjoy exemption from state VAT/CST (example Karnataka)[8].
Foundations of GST are credit fungibility and removal of exemptions. It is assumed that when GST will kick in, all these exemptions will be taken off. Further, as electricity duty may not be subsumed within the GST, the states will continue to levy the same. So overall there will be increase in the cost of delivered solar electricity.
So let’s draw a comparative table to find out how Grid Interactive Solar Power Systems Projects (GISPS) are going to be impacted after GST comes to place.
Grid Interactive Solar Power System


Component

Proportion in Overall Project

Supply Chain Assumption

Pre-GST Taxation

Post GST Taxation

Implication

CAPEX

Photovoltaic Cells

55%

Predominantly imported

No customs duty at all

IGST[9]

Increase in CAPEX

Premises

5%

Intra-State Leasehold

Service Tax @ 14.5%

CGST + SGST[10]

Increase in CAPEX

Project establishment engineering and miscellaneous works

9%

Intra-State and Inter-State

Service Tax @ 14.5%

IGST+ CGST+SGST

Increase in CAPEX

Escalating Frames

8%

Inter-State

Excise Duty Exempt + Concessional CST

IGST

Increase in CAPEX

Power Conditioning Device

7%

Intra-State

Exempted from Excise Duty and State VAT (applicable States)s

CGST+IGST

Increase in CAPEX

Evacuation Infrastructure (Goods)

9%

Intra-State and Inter-State

Excise Duty Exempt + Concessional CST + Concessional VAT

IGST + CGST + SGST

Increase in CAPEX

Pre-Operational Expenses (Services)

7%

Intra-State and Inter-State

Service Tax @ 14.5%

IGST + CGST + SGST

Increase in CAPEX

O&M

Plant Operation And Maintenance

100%

Treated as intra-state works contract

State VAT + Service Tax on 70% of the value

CGST + SGST

Impact depends on rate of state VAT
In addition to increase in CAPEX and O&M, the continuous imposition of electricity duty will make the delivered cost of energy more expensive.
The GST Model Law is already in the public domain and India has set quite ambitious target in terms of renewable energy. Accordingly, if exemptions are withdrawn due to introduction of GST, the investors are very unlikely to remain attracted to this sector. Accordingly, it is must that the exemptions available under the existing laws are maintained under GST as well to ensure India can achieve its RE target comfortably.


[1] Entry reads “Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92A of List I

[2] The Constitution (One Hundred And Twenty-Second Amendment) Bill, 2014

[3] The proposed entry 54 reads “Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-State trade or commerce or sale in the course of international trade or commerce of such goods”.

[4] BCD is Basic Customs Duty and ACD is Additional Duty of Customs vide No. 01/2011-Customs, dated 6 January 2011.

[5] Vide No. 24 /2005-Customs,dated 1 March 2005

[6] SAD is Special Additional Duty vide No. 21/2012-Customs, dated 17 March 2012.

[7] Notification no. 15/2010-CE dated 27 February 2010.

[8] Notification No. No. FD 71 CSL 2015 Dated: 1st August, 2015.

[9] Proposed Rate is 20%. BCD is expected to be out of GST so BCD exemption will continue.

[10] Proposed Rates are 10% each for CGST and IGST totaling 20%.





[1] Central Goods And Services Tax.


[2] State Goods And Services Tax.


[3] Integrated Goods And Services Tax.


[4] For Services its only IGST.

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