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Union Budget 2023-24:Expectations of the Renewable Energy Industry

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09 January 2023

Union Budget 2023-24:Expectations of the Renewable Energy Industry

Authored by Shyam Sharma - CFO, O2 Power

Union Budget 2023-24:Expectations of the Renewable Energy Industry

The buzz for renewable energy, green hydrogen is increasing by the day in our country. With goals of being a frontrunner in environmental resurrection and sustainability measures, the Government of India (GoI) has set a very ambitious target of commissioning 500 GW of renewable energy capacity by the year 2030. While it is seen to be aggressively paving the way for a world-class ecosystem to boost domestic production in India, the current global geo-political constraints including the Russia-Ukraine conflict, China’s continuing strained Covid status, and an impending depression in the western world, are putting pressures in the Indian markets. Now, more than ever, RE developers and Independent Power Producers (IPPs) seek the GoI’s firm hand-holding in the form of direct and indirect tax policy support, local regulation changes and implementation, amendment in Electricity Act to promote captive and third party green power procurement, priority lending at cheaper rates, easy exit mechanisms through favorable Infrastructure Investment Trusts (InvIT) regulations, support for localized manufacturing of major capex items through more Production Linked Incentives (PLIs) in the manufacturing of solar modules, wind turbines, battery energy system, and electrolyzers for green hydrogen.

 As IPPs in the renewable energy sector, we hope the Union Budget 2023-24 will take cognizance of the above requirements, and will trigger the following impetuses: 

Indirect Tax

  1. Allow import of solar modules under Project Import License Scheme at concessional rate of 5% for grand-fathered projects

The Basic Customs Duty (BCD) on solar modules was increased to 40% w.e.f. 1st April 2022. This has had an adverse impact on projects bid on or before March 31, 2021, rendering them unviable as Discoms are not ready to accept this change under change in law. Further, the Finance Ministry issued a notification (No. 54/2022) on 19th October, 2022 disallowing solar module imports under Project Import scheme. These developments have resulted in significant slowdown in solar capacity installation in FY 22-23.

 To enable IPPs to commission previously bid solar projects, we hope the Finance Ministry will allow solar module import under Project Import scheme @ 5% custom duty rate under grandfathering scheme for projects where bids were concluded before 31st March, 2021 (already recommended by the MNRE to the Finance Ministry). 

  1. Optimize applicable customs duty applicable on import of solar modules for projects awarded post 31st March, 2021

The move by the GoI to increase the applicable customs duty on import of solar modules from NIL to 40% and on solar cells from NIL to 25% w.e.f. 1st April 2022, has severely impacted the solar sector. This is because, domestic manufacturing capacity of modules is still in the ‘under-development’ stage -- the only option available to developers at this point of time is to import the same. The lag has resulted in cost overruns for solar power projects as well as strained supply conditions. Considering it will take another 2-3 years for the domestic manufacturing capacity to meet the industry requirements, GoI should reduce the BCD to 10%/5% till 31st March, 2025 for projects bid-out after 31st March, 2022. BCD can be increased to 40% / 25% from 1st April, 2025 on the back of adequate availability of locally made solar modules.

  1. Reinstate “solar power generating system” in new entry at serial no. 201A in Schedule II of Notification No. 1/2017
Central Tax (Rate) dated 28.06.2017, in place of the newly inserted term “solar power generator” to avoid different interpretation by the RE industry and GST officers. Else, this might result in unnecessary tax litigations and harassment of solar power developers.

Further assumption of 70:30 ratio for goods and services on composite supplies for a solar power generating system (Notification No. 27/2018 – Central tax (Rate) dated 31 December 2018) needs to be corrected to 90:10 to reduce tax incidence on the project company.

  1. Optimize GST applicable on procurement of EPC services for wind power projects

Majority of Wind IPPs are dependent on third-party EPC service providers for setting up of wind power projects across India. Such EPC service providers are responsible for supplying all the goods (including wind turbine generator) and services required for setting up of such projects. As per the existing GST provision, this would classify as a composite supply and should be subject to GST as per 70:30 provision, as in 70% value subject to 12% GST and 30% value subject to 18% GST [by virtue of explanation to Entry No. 201A of Schedule II of N/No. 1/2017-GST], resulting in overall tax cost of 13.8%.

However, for such wind projects, the proportion of goods and services is around 90:10 - so if the developer procures goods and services from two different vendors, the overall tax cost would be around 12.6% since 90% value would be subject to 12% GST and only balance 10% value would be subject to 18% GST. Therefore, for wind power projects, procuring end-to-end EPC services from a single vendor has become an inefficient option from the GST standpoint; whilst commercially it is more viable for developers to have a single end-to-end EPC contract. In this regard, the Indian Wind Turbine Manufacturers’ Association (Association) have also approached Hon’ble Delhi High Court to seek relief and consequently, the high court directed the GST Council to re-evaluate the prescribed tax structure of such projects.

We therefore request the Finance Ministry to make either of the following changes:

Change the 70:30 proportion specifically for wind power projects and align it to the actual ratio of goods vs services which should be, say, 90:10
Or
Allow the admissibility of item wise billing and GST applicability as per applicable HSN code for wind power projects even in case of a composite end-to-end EPC contract 
  1. Reduce the GST rate on Green Hydrogen

In terms of Notification No. 1/2017 – Central tax (Rate) dated 28 June, 2017, all inorganic chemicals under the HSN chapter 28 are to be taxed at 18% due to which hydrogen covered by HSN 28041000 is subject to 18% as well. Considering the GoI has been actively promoting the manufacture and use of green hydrogen and ammonia in the country, the present cost of producing green hydrogen is unviable for developers. It is higher than the cost of producing grey hydrogen, thus making green hydrogen less competitive.

Therefore, a reduction in GST rates and duty waivers should be granted to render green hydrogen more competitive 

  1. Relaxation in terms of contiguous land parcel for setting up of facility under the SEZ law and draft DESH Bill for making export of Green Hydrogen / Ammonia more competitive

Presently, the approvals for the setting up of SEZ units is granted subject to condition that land parcels upon which the unit is to be set-up are contiguous. However, in case of integrated green hydrogen /  ammonia facility, various sub-facilities are required to be set up across huge land parcels and such land parcel may not be contiguous. Therefore, relaxation for such condition in the SEZ law and Development of Enterprise and Service Hubs Bill (DESH Bill) needs to be provided to enable Green Hydrogen / Ammonia producers be more competitive in the exports market. 

  1. Changes in SEZ provisions to include RE projects in SEZs

        It may be noted that as a pre-condition for seeking SEZ unit approval, a facility is not permitted to set up a non-conventional power plant in the SEZ area. However, in this regard, previously the Director SEZ had allowed setting up of such power plants for power generation, transmission and distribution companies vide Circular number K-43014(16)/8/2020-SEZ dated 07 June 2021, subject to UAC approval and other conditions.

 It is noted that for production of green hydrogen / ammonia, the usage of renewable source of energy is imperative and therefore, it is essential to set up a non-conventional power plant within the SEZ area. Furthermore, it is also observed that setting of non-conventional power plant outside the SEZ unit area is economically unfeasible, due to high import duty costs. Therefore, the above relaxation should also be granted under the draft DESH Bill to allow the companies to set-up green hydrogen / ammonia and renewable energy power plants within the SEZ unit area. Considering there is a proposal to make significant changes in SEZ provisions, the RE industry seeks the inclusion of standalone RE units in SEZs to allow the SEZ units to go green and achieve net-zero commitments.

  1. Lower customs duty rate on import of Battery Energy Storage System (BESS) or Battery Packs used with RE projects from 10% to 5%

BESS is one of the most promising near-term storage technologies for power and energy storage which stores electrical energy electrochemically. BESS helps make intermittent green power firm in nature and reduces dependency on coal for grid stabilization. For setting up of these energy storage systems / projects in India, one of the major components used in BESS is Lithium-Ion Batteries which are also called ‘Electric Accumulators’. These are classified under HSN 85076000 on which the current effective applicable BCD rate is 10%. Since the domestic manufacturing capabilities for lithium-ion batteries are still at a nascent stage, developers have huge reliance on importing these goods from outside India, thus attracting the 10% customs duty. This results in increase in overall RE project development cost which already has huge indirect tax cost embedded into it, thereby increasing the tariff of electricity to be supplied.

Hence, GoI should consider lowering the customs duty rate to 5% on import of lithium-ion batteries used as a part of BESS, at least for the next few years. 

  1. Make electricity taxable under GST

If the existing GST exemption on electricity is withdrawn, companies involved in setting up renewable energy plants will be able to avail GST credit on capital investment and input services, which can also be passed on to the final customer. This will also ease the burden of the recent increase in GST rate from 5% to 12%. 

  1. Provide separate pool of capital in the budget to central off-takers (SECI / NTPC / NHPC) and state discoms to compensate increased incidence of GST from 5% to 12% w.e.f 1st October, 2021 and Custom Duty hike from Nil to 40% w.e.f 1st April, 2022 in one installment to already awarded projects. This pool can be created from increased Indirect tax collection from rate change to enable faster settlement of change in law claims without burdening the discoms / off-takers. This will help discoms and off-takers to avoid passing on these additional costs to end consumers, and IPPs not taking the hit due to delayed payments and increased interest costs.

Direct Tax

  1. Extend lower corporate tax rate of 15% on new manufacturing companies by 5 years

At present lower corporate tax rate of 15% under section 115BAB (lower basic corporate tax for new manufacturing Companies including Electricity Companies incorporated after 1st October, 2019) will lapse on 31st March, 2024. As a pre-budget recommendation, the RE industry requests extension in time to complete manufacturing plants by another 5 years to 31st March 2029 to attract more foreign capital under the ‘Make in India’ initiative. Given corporate India has lost two years to the pandemic, this extension of five years will bolster GOI’s efforts to expand manufacturing base in India and maximize the potential of various PLI schemes by taking the ‘Make in India’ initiative to a global level. 

Extending it one year in each budget will not encourage the manufacturing sector as Corporates need clear tax policies / rates for medium to long term to plan for new capex. 

  1. Extension of sun-set date under Section 194LC and 194LD for concessional rate of 5% Withholding Tax expiring on 30th June, 2023.

To retain the attractiveness of Indian debt market for foreign investors, the sunset date for both sections (194LC and 194LD) should be extended, as has been done multiple times in the past. This will incentivize investors to stay invested for a longer duration, deepening the debt market for RE and Infrastructure sector and increasing foreign currency reserves. 

  1. Extend base withholding tax rate of 5% under section 194LC to include INR denominated ECBs / NCDs 
  1. Section 94B (Thin Cap disallowance):

Clarification to be added in Section 94B that interest paid to Non-Associated Enterprises (Lenders etc.) should not be considered while computing the excess over 30% EBITDA. This anomaly is resulting in litigations, and is a pain point for IPPs  

Exclude corporate guarantees provided by non-resident parent company to the subsidiary for availing project financing from provisions of section 94B(1)

      5.     Exempt applicability of section 79 (lapse of carry forward and set-off of losses) on transfer of more than 51% shares of a company to InvIT / REIT structure to help mobilize savings and provide liquidity to the infrastructure sector

      6.     Reduce period of holding for REIT / InvIT units from the current 36 months to 12 months, so that long term capital gains are at par with the time period for listed equity shares. This will incentivize investments in REIT / InvIT resulting in providing more liquidity into the infrastructure and real estate sector.

      7.     Exempt Sovereign Wealth Funds (SWFs) / Pension Funds (PFs) for investments made via their wholly owned subsidiaries outside India. This will help attract more foreign investments and patient capital for the country’s infrastructure space.

Manufacturing-related Incentives

The GOI announced Rs. 24,000 crores of PLIs in the RE sector in Budget 2021 and 2022. To promote investment in complete forward and backward integration of supply chains in Solar, Wind, Batteries and Green Hydrogen, further allocation of PLIs along with concessional power and land, favorable direct and indirect tax policies, local rules / state incentives need to be provided to the sector to make India competitive due to economies of scale kicking in, be self-sufficient for its domestic requirements and become an export hub. 

 Finance

  1. Allow insurance companies, provident funds / NPS and mutual funds (long term patient capital) to invest in bonds issued by operating infrastructure companies rated below AAA / AA to increase liquidity in local bond markets. Government can earmark one of the Public Financial Institution (in addition to IIFCL) to enhance credit of the bonds for a fee with a simple process to help deepening of the local bond markets and help in refinancing of operational Infrastructure projects
  2. National Bank for Financing Infrastructure and Development (NaBFID) was announced in Budget 2021 to provide long-term funding to the infrastructure sector with initial capital outlay of INR 20,000 crores. NaBFID has just started operations and needs to start appraising the Infra projects on bigger scale and disbursing at the earliest. Further capital allocation to NaBFID needs to be done in budget 2023 with higher disbursal targets to fund greenfield projects and refinance existing loans at competitive rates to free up loan books of the Banks / Financial Institutions for greenfield projects.
  3. Rs 1500 Crore allocation was made to IREDA in Budget 2021. IREDA is the only RE-focused financial institution and given the increase in size of RE projects and to meet higher debt requirements per project, IREDA needs to be allocated more capital in this budget.
  4. IREDA, NaBFID, REC and PFC should also pursue raising higher level of ESG Green bonds at competitive rates to reduce their lending rates and be more competitive
  5. 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 do not lend to the RE sector citing full exposure to the power sector exposure. RE industry’s request is to create separate a category for Renewable Energy (solar, wind, solar wind hybrid, battery energy storage, biomass, hydrogen, small hydro) under priority sector lending to enable RE IPPs get more bank funds.

The suggested changes, if enabled, will go a long way in providing sustainable impetus to the growth of the renewable energy sector. As industry players, we await a positive action from the Finance Ministry this Union Budget.

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