GST 2.0: Tax cuts to fuel India's clean energy sector as rates on parts slashed to 5%

Finance minister Nirmala Sitharaman said the new tax rates will come into effect from September 22 this year.

The goods and services tax (GST) Council in its 56th meeting held in New Delhi on September 3 reduced the tax on renewable energy devices and parts used for manufacturing from the existing 12 percent to 5 percent.

The Council, however, increased the tax on coal and lignite from 5 percent to 18 percent. Moneycontrol had reported that the Council could reduce the tax on renewables while increasing it for coal as a means to compensate for the revenue loss to be incurred by the state governments.

The Council has also reduced the GST for non-lithium ion batteries such as lead acid, sodium and flow batteries from 28% to 18%, aimed at scaling grid-scale energy storage technologies for storing renewable power for longer duration. The GST for lithium-ion batteries shall remain 18%.

Finance minister Nirmala Sitharaman said the new tax rates will come into effect from September 22 this year.

"GST has been reduced from 12% to 5% on renewable energy devices and parts for their manufacture such as biogas plants, windmills, wind-operated electricity generators, waste to energy plants, devices, PV cells, whether or not assembled in modules or made up in panel, solar cookers, solar water heaters and systems, and so on," Sitharaman said addressing a press conference after the GST Council meeting.

Apart from electric vehicles (EVs) which already attract 5% GST, the Council has also reduced the tax for fuel cell cars, buses and trucks from the current 12% to 5%. The motive behind this is to promote hydrogen vehicles based on fuel cell technology, which is a mandate under the Indian government's National Green Hydrogen Mission.

Rishabh Jain, Senior Programme Lead, Council on Energy, Environment and Water (CEEW) said reduction in GST rates on clean energy technologies such as solar, wind, and batteries can lower project costs, improving the competitiveness of renewable power.

"Since electricity supply is GST-exempt, developers cannot claim input tax credit, and the GST paid on equipment and services is effectively passed on as a cost. Lower costs would make clean energy more attractive for discoms, commercial, and residential consumers, thereby accelerating deployment. Greater installations would also stimulate demand for domestic manufacturing and jobs, complementing central government policies such as the PLI scheme," Jain told Moneycontrol.

Reduced tax on clean energy products will attract more investments from players such as Reliance Industries, Adani Group, Tata Power, NTPC Ltd, Waaree Energies and ReNew while making room for new players.

“A reduced GST on the renewable sector, will also solve the problem of unsigned power purchase agreements, as discoms would get the confidence of even lower tariffs,” an official said.

As for coal, the impact of higher tax will be somewhat offset by the removal of the compensation cess. At present, the 5 percent GST and the compensation on coal amount to an effective rate of 15–40 percent, depending on the grade of coal.

In, India crossed a milestone with 50 percent of its total installed electricity capacity coming from non-fossil fuel sources, accomplishing the target five years ahead of the plan. Non-fossil fuel sources now comprise 242.78 GW of total 484.82 GW installed capacity.

Disclosure: Moneycontrol is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.