Lawyers | ||||
|---|---|---|---|---|
|
Tax liability for solar power business in India
I
Legal and Financial Aspects of Solar Energy and Renewable Energy Projects in India
India, with its initiatives in the renewable energy sector, is striving to secure the future of its generations by meeting the growing energy demands. With the support of the government, private enterprises, and public sector companies, the solar industry is growing rapidly. Though the targets set by the government for solar energy generation are ambitious, it is highly likely that these targets will be achieved.
India has been steadily increasing its installed solar power capacity. In the financial year 2014-15 alone, nearly 950 MW of solar power was added, pushing the total installed capacity beyond 3000 MW. The growth is attributed to the National Solar Mission, state solar policies, and increased enforcement of the Renewable Purchase Obligation.
Globally, India ranks as the fifth-largest power producer, and it is also the fifth-largest producer of wind energy. By March 2014, India had an installed power generation capacity of 245 GW. The country’s solar potential is vast, with the photovoltaic installed capacity growing at a compound annual growth rate (CAGR) of 49.5% between 2010 and 2014. The Jawaharlal Nehru National Solar Mission aims to generate 20,000 MW of solar power by 2022.
Depreciation in the Solar Power Sector
Depreciation refers to the reduction in the value of an asset over time due to use, wear and tear, or obsolescence. Assets can be categorized as tangible or intangible. Tangible assets include physical properties such as machinery, buildings, and land, while intangible assets include non-physical properties like patents, trademarks, and goodwill.
Under Section 32A of the Income Tax Act, 1961, the permissible depreciation rates are defined. For solar energy assets, various devices, including flat-plate solar collectors, solar cookers, and solar power systems, qualify for a depreciation rate of up to 80%.
Accelerated Depreciation
To incentivize solar power generation, the Government of India allows an 80% depreciation in the first year of the commissioning of a solar power plant. This accelerated depreciation encourages entrepreneurs to enter the solar power generation market.
For example, if a solar power plant costs Rs. 7 crores, the company can claim 80% depreciation on the cost of plant and machinery. After deducting costs for land (eligible for only 10% depreciation), the total cost of the plant would be approximately Rs. 5.15 crores after the depreciation benefit.
This accelerated depreciation reduces the project cost and provides significant tax savings, encouraging investment in solar power generation.
Tax Waiver for Solar Power Companies
Under Section 80-IA of the Income Tax Act, solar power generating companies are eligible for a 100% tax waiver on profits for 10 assessment years, during the first 15 years of their operational life. This is applicable for plants commissioned by March 31, 2017.
Impact of GST on Renewable Energy Projects
The introduction of GST has had varying impacts on renewable energy projects, particularly in terms of the levelized tariff and capital cost. For solar energy projects, the cost of setting up and operations is expected to increase by 12%–16% due to GST implementation. This will affect procurement patterns, especially for off-grid and wind energy projects.
GST Implications on Solar Off-Grid Projects
The capital cost for solar off-grid projects consists of different components such as solar panels, batteries, power conditioning units, cables, and installation costs. The taxation on these components differs based on whether they are imported or sourced domestically. For example:
- Solar Panels (30% of capital cost) are largely imported (80%).
- Batteries (36% of capital cost) are largely sourced domestically (70%).
- Installation Costs (7% of capital cost) are fully sourced domestically.
While GST introduces a seamless tax structure, the taxes paid on inputs, capital goods, and services would continue to be a cost. The GST impact will vary depending on procurement patterns (import vs. domestic purchase) and the exemptions available under the current regime.
Government Exemptions and Concessions for Solar Plants
The government has provided several exemptions and concessional rates to promote the solar energy sector. These include:
- Customs Duty Exemptions: Concessional rates of 5% on the import of machinery and equipment required for setting up solar power generation projects.
- Excise Duty Exemptions: Exemption from excise duties on machinery and equipment used in the solar power generation sector.
- VAT and CST Exemptions: States like Maharashtra, Rajasthan, and Uttar Pradesh have exempted solar energy equipment from VAT and CST.
These exemptions significantly reduce the upfront cost of solar power generation plants and encourage investments in the sector
While India continues to grow as a global leader in renewable energy, especially in solar power, several financial, legal, and tax factors shape the landscape. The government’s incentives, such as accelerated depreciation, tax exemptions, and GST adjustments, play a crucial role in making solar energy an attractive investment. However, the transition to the GST regime may lead to increased costs in some areas, especially for imports. Companies must navigate these changes carefully to maximize the benefits of government policies and minimize the impact of higher tax rates on procurement costs.
By understanding these legal and financial implications, businesses can make informed decisions, reducing their tax burden while contributing to India’s renewable energy goals.
