OPINION: Tax consolidation schemes need an hour for India’s renewable energy sector

By Jimit Devani, Naman Shah and Jash Davda

India has achieved a revolutionary development in the renewable energy (RE) sector. Over the past 7.5 years, installed RE capacity has increased by 286%, making India the fourth largest in the world, for installed RE capacity. In October 2021, India’s RE capacity reached 149.57 gigawatts (GW), up from 94.4 GW in 2020.

the Union budget, 2021 has featured various reforms and initiatives aimed at boosting the unconventional energy sector in India. The first of these was the bugle call for ‘Atmanirbhar Bharat‘ and ‘Vocal for Local’, introducing a ₹4,500 crore Production Linked Incentive (PLI) scheme for solar cells and modules. An overwhelming industry response to the PLI scheme led to further enhancement of the scheme to ₹24,000 crore to boost exports.

Recently, on January 20, 2022, the Cabinet also approved a capital injection of ₹1,500 crore to the Indian Renewable Energy Development Agency (IREDA) as proposed in the Union Budget, 2021.

However, the journey has only just begun and there is still much to do. The renewable energy sector has a gigantic target of 227 GW of generation capacity in 2022, of which around 114 GW is planned for solar, 67 GW for wind and the rest for hydro and bio, among others.

Further, at the COP 26 climate summit in Glasgow, reinforcing its commitment to climate change, India pledged five –
‘Panchamrits’ – become a ‘net zero carbon emitter by 2070.

To achieve this ambitious goal, various reforms are expected in the 2022 Union budget to push the industry. A few of them are listed below:

Extension of LIP programs

Currently, the PLI scheme only covers solar cells and modules. However, to boost domestic manufacturing, it is also imperative to incentivize other members of the renewable energy segment. This can be achieved by extending the benefits of the scheme with additional budget allocation to:

  1. Manufacturers of electrolysers to generate green hydrogen
  2. Manufacturers of batteries for electric vehicles
  3. Greening Indian Railways
  4. Wind turbines.

Tax incentives for the adoption of the green economyPromoting green technologies is key to India’s commitment to its net zero emissions goal. Countries around the world are taking steps to advance the green economy by providing free land, concessional electricity costs, low interest financing, government incentives, and more. in addition to concessional tax rates.

To push renewable energy players and provide a level playing field globally, similar benefits could be provided in the upcoming budget. With regard to tax-related measures, it is expected that a preferential tax rate of 15% will also be extended to companies investing in green technologies, combined with an additional deduction for the investment or purchase green technology assets.

Promoting social infrastructure projects like converting waste to energyIn order to promote social infrastructure projects such as energy recovery from waste as well as projects that lead to the transformation of waste into energy, it is recommended that they be included in priority sector loans. This has been successfully implemented by the municipalities of Indore and Nagpur.

The government may, together with the state government/municipal corporation/gram panchayat, develop a policy setting a development target for such social infrastructure projects in the respective localities. Companies participating in such projects should also be incentivized with tariff rate subsidies, free land and other benefits.

Tax consolidation policyTypically, RE projects are domiciled in separate Special Purpose Vehicles (SPVs) for various reasons such as regulatory constraint, convenience for bankers, and the need to separate cash flows. Having multiple SPVs for a single line of business leads to inefficiencies and increased compliance burden.

Also, the losses of one SPV cannot be offset against the profits of another SPV. All these factors make tax consolidation schemes a need of the hour and therefore group tax consolidation may be considered to streamline tax arrangements and make more products available in the hands of investors.
Rationalization of GST ratesThe Goods and Services Tax (GST) rates on specified RE appliances and parts have been increased from 5% to 12%, whereby the effective rate of GST for EPC contracts has increased from 8, 9% to 13.8%. It is therefore recommended that the GST rate be restored to 5% in order to reduce the cost for businesses.

There are various other measures that need to be taken in order to establish long-term political stability and promote investment in the renewable energy sector, such as the regularization of DISCOM payments, land acquisition and the resumption of projects. staggered. Thus, the RE sector expects
Budget 2022 to pursue the ambitious dream of making India a net zero carbon emitter by 2070.

Jimit Devani is Partner, Naman Shah is Principal and Jash Davda is Deputy Principal at Deloitte Haskins and Sells LLP.

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