Moneycontrol
Last Updated : Jun 27, 2016 07:48 PM IST | Source: Moneycontrol.com

Last chance for individuals to invest in solar to claim benefits

When scouting for avenues for investment in solar assets, it may be considered that distributed generation of solar power may either be done off-grid (serving rural areas without grid connectivity) or on-grid (residential and commercial rooftop solar plants).

Ajit Krishnan

The Government has left no stone unturned to demonstrate the importance it places on solar power with an eye on energy security and the future. Given the 100 GW solar target by 2022, a number of incentives have been offered at different points in time for its achievement. The one that has caught the fancy of outsiders to the energy business is accelerated depreciation (AD) under Income-tax. AD has also been instrumental in promoting investment in wind energy in the recent past.

However, in this year’s Union Budget, aligned to the Government’s tax policy, it was stated that the AD benefit is intended to be scaled down to no more than 40% from next year. Therefore, for the current year this becomes one last shot at a sound tax saving opportunity for a large section of non-salaried individuals, who may be doctors, lawyers, accountants, traders or such.

Simply put, AD allows 80% of the value of investment in solar power generation assets to be charged as depreciation against profits for the year in the first year itself, thereby reducing the taxable profits and accordingly tax payable. These profits may have been derived by individuals from any business or professional sources.

This effectively means tax saving of 24% of the value of investment (assuming the 30% tax bracket applies) this year, if made prior to 30 September. While for the current year it would improve cash flows, it would also result in supplementary income in the future in the form of power tariff from energy consumers.

Illustration – Investment in a 150 kW solar plant

Particulars

Amount

Business / professional income for the year

INR 1 crore

Tax normally payable

INR 30 lakh

Investment in solar assets (may also include a loan taken)

INR 1 crore

Depreciation (AD @ 80% + Additional depreciation @ 20%)

INR 1 crore

Tax payable

Nil

Tax saving

INR 30 lakh

Approximate annual profits from solar plant (in a no-loan scenario, which may escalate year on year)

INR 10 lakh



Prerequisites for claiming benefit:

  • Sufficient taxable profits arising from business or profession during the year to be offset
  • Investment made prior to 30 September 2016
(Disclaimer: Numbers and figures shown are indicative approximations only for illustration)

The numbers would indicate that there is a case to be made for solar as a self-sustaining investment opportunity, notwithstanding gradual withdrawal of AD benefits.

When scouting for avenues for investment in solar assets, it may be considered that distributed generation of solar power may either be done off-grid (serving rural areas without grid connectivity) or on-grid (residential and commercial rooftop solar plants). In both scenarios, there would be a service provider, engaged in the business of solar power, who would take responsibility for setting up, operating and maintaining the plant as well as collecting tariff from consumers.

With respect to grid connected rooftop solar, the number of entrepreneurs and contractors in the sphere is steadily growing. Further, the Ministry of New & Renewable Energy (MNRE) also has a list of approved channel partners, which has been rapidly expanding. This means there is no dearth of rooftop solar installers, if investors and rooftop owners can be adequately matched.

On the off-grid rural side however, models to attract public investment have not evolved as much and may present a vibrant opportunity. With that being said, off-grid rural is starting to be looked at a lot more closely by companies as a means of discharging the now mandatory statutory CSR obligations, though there is no AD motivation in this case.

The withdrawal of AD benefit is not likely to materially impact investment in and development of solar power generation capabilities. Rather it would now provide a level playing field to energy and non-energy companies (as AD made solar projects more financially viable for companies having other profit making businesses) and shift the focus from quantum of investment to quality, dependability and durability.

Nonetheless, many individuals can indeed still make hay while the sun shines on AD. With or without it, there’s no denying that solar is on the rise.

Author is tax partner with EY India

(Amish Behl, Senior Tax Professional, EY also contributed to the article)

(Views expressed are their personal)
First Published on Jun 27, 2016 07:48 pm
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