Expectations Of The Renewable Energy Industry – Budget 2021

16 January 2021

Expectations Of The Renewable Energy Industry – Budget 2021

Authored by Shyam Sharma – CFO at O2 Power

Government of India (GoI) has set very ambitious target of commissioning 175 GW of renewable energy capacity by the year 2022. This includes 100 GW from solar, 60 GW from wind. The target for 2030 is to reach 450 GW.

To achieve these targets, GOI needs to provide impetus to the growth by providing favorable Direct and Indirect Tax policies, priority lending at cheaper rates, provide mechanisms for easy exits through favorable Infrastructure Investment Trusts (InvIT) regulations.

Expectations of Independent Power Producers (IPPs) in the renewable energy sector from Union Budget 2021-22 for faster growth are summarized below: –

Direct Tax
  • Base tax rate of 5% under section 194LC should be extended to include INR denominated ECBs.
  • Extend time of commencement of manufacturing under section 115BAB by another 5 years to 31st March 2028 to attract more foreign capital under Make in India initiative.
  • Exemption from applicability of section 79 (lapse of carry forward losses) on migration to InvIT structure
  • Amendment in the provisions of Section 112(1)(c)(iii) to provide a consistent long-term capital gain tax rate of 10% to unlisted units of InvIT which applies to other unlisted securities and unlisted shares
  • An exclusion should be provided in Section 194 and section 193 wherein TDS provisions shall not be applicable on dividend income and interest on securities paid by SPV to InvIT
  • Withholding tax rate on distribution of dividend by InvIT to a non-resident should be applied at ‘rates in force’ under Section 194LBA instead of the current tax rate of 10% i.e. 10% or treaty rate whichever is beneficial
  • Reduce the period of holding for the units of InvIT from 36 months to 12 months for long term capital gains to be in line with time period for listed equity shares
  • A suitable amendment to the definition of ‘SPV’ should be provided under Section 10(23FC) to align with the definition provided in SEBI InvIT This amendment is required as InvITs are governed by SEBI InvIT Regulations
  • In a two-layer structure (Hold Co – SPV) below InvIT, provisions of section 115JB should be amended to adjust the deduction under Section 80M from the book profits in the hands of Hold Co. so as to avoid any cascading effect
Indirect Tax

Change in explanation to Entry 234 of Notification No. 1/2017 – Integrated Tax (Rate) dated 28.06.2017 – In case of composite supply deemed proportion of 70:30 in a Solar Power generating system to be changed to 90:10

As per the explanation appended to Entry 234 of Notification No. 1/2017 – Integrated Tax (Rate) dated 28.06.2017, 70% of the Contract Value would be deemed to be leviable to GST at 5% and the remaining 30% would be leviable to GST at 18%, thereby leading to an effective GST rate of 8.9%.

Typically, services portion in a Solar project is around 10% and supplies are around 90%. However due to afore-mentioned Entry 234, industry is forced to resort to 8.9% taxation even though the intent of GST Act was to provide effective rate of 5% to solar industry. Industry request is to change the aforementioned notification to assume deemed value of supplies to 90% @ 5% and 10% value to be ascribed to services @ 18% giving an effective rate of 6.3%. This will help in faster growth of solar sector, reduction in tariffs, easier GST compliance, harmonize bid tax assumptions and avoid tax litigations.

Further a provision can be introduced that based on certificate of the project development company for utilization of supplies in a solar power system, supplier/ manufacturer can supply the products under HSN 84,85 & 94 @ 5% to the EPC Company and claim refund. This will eliminate the refund and working capital requirement at EPC Contractor level enabling reduction in overall system costs.

Amendment of formula prescribed for claiming refund under inverted duty structure – Existing formula provides for exclusion of input tax credit (ITC) pertaining to input services from the pool of total ITC, while the turnover amount includes both supply of goods and services. So, this results in increase in tax cost to those suppliers who supply SPGS as a whole to SPV companies, since the resultant refund amount is either NIL or less than the actual accumulation. Request Ministry of Finance to review the same and amend the formula so as to optimize the possible refund amount.

Further refunds under inverted duty structure needs to be fast tracked to reduce working capital issues for the EPC companies.

Continuation of exemption on BCD on import of modules for some more time until local manufacturing scales up – While exemption on BCD on import of modules is continuing as of now, but said exemption in near future would be taken away in near future to promote Make in India initiative. The proposal is to replace the current safeguard duty, which expires in Jul 2021, with BCD, thereby increasing the overall BCD rate to ~20%. However, industry strongly feels that until local manufacturing setup gets commissioned to match the domestic demand of modules at competitive rates, such BCD exemption should continue for another 2 years.

    • Presently Renewable Energy is clubbed within definition of Power under priority sector lending provided by RBI. Due to stressed thermal power assets, majority of banks are not lending to RE sector citing that their Power sector exposure is full. Industry request is to create separate category for Renewable Energy (Solar, Wind, Solar Wind storage Hybrid, Biomass, small Hydro) under priority sector lending to enable RE IPPs to get more bank funding.
    • Creation of large-scale specialized Infrastructure Funding Institution which can refinance the operating renewable energy assets at competitive rates and help Banks / NBFCs / Public Financial Institutions to recycle their infra debt book and free up their capital to fund more of green field projects.
    • Capitalizing Indian Renewable Energy Development Agency (IREDA) further at concessional rate of funding lines to enable it to fund larger scale green field RE projects without limitation of project and group exposure.

The suggested changes will go a long way in giving stimulus to the growth of renewable energy sector and -industry awaits a positive action from the Government of India.

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