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Published:May 5, 2017 2:34 PM
Need for GST Goods & Services Tax (GST), the combined goods and services tax and the strongest economic reform in the country after 1991, will subsume all the indirect taxes on goods and services imposed by the Centre and the State under a single umbrella. GST is aimed at simplifying the taxation regime, doing away with multiple/cascading effect of taxations on the final price of a product and thus will bring in efficiencies in the country. There might be some heartburn’s like inflation in the early days of implementation of GST but GST will improve GDP of the country in the long run. However, uncertainty prevails over the date of rollout of the GST programme due to the lack of clarity on a number of issues related to GST implementation. Though the tentative date of GST implementation is 1st July 2017 (which may be extended to 1st October, 2017), we are still lagging behind in evolving a general consensus before its implementation. Advantages of Goods & Services Tax (GST) Impact of GST on Power Sector Increase in Cost of Power Projects Long term power contracts may or may not have provisions to deal with changes in laws and taxes. Amended tax rates on the input side would impact project costs (capital costs & operational costs) and pricing would need to be reworked after taking into account the change in tax structure. Long term power contracts may or may not have provisions to deal with changes in laws and taxes. Amended tax rates on the input side would impact project costs (capital costs & operational costs) and pricing would need to be reworked after taking into account the change in tax structure. Power Sector pricing is subject to the approval from the Electricity Commissions and implementation of GST might lead to piling up of input tax credits which will not be set-off against the end product, leading to increase in project costs. This would hurt the profitability of the developers especially if they are not able to pass the increase in costs of the projects to the buyers. Doing Away with Concessions/Exemptions applicable to the Power Sector Considering the role of power sector in the development of the country’s economy and to boost investments in the sector, both the Central and the State Governments have been providing a no. of exemptions/concessions for setting up power projects. The Model GST Law is silent regarding the status of concessions/exemptions applicable to the power sector in the new GST Regime. The Model GST Law is silent on concessional 2% rate applicable for inter-state procurements by entities engaged in the production and distribution of electricity which helps them cut costs. In the possible scenario of doing away with these concessions/exemptions, cost of power projects are likely to escalate further. Re-negotiation of the Existing Power Purchase Agreements (PPAs)/Power Contracts Power Purchase Agreements (PPAs) provide for pass through of increase in project costs to the buyers under relevant clauses of the PPAs. However, in case of PPAs/Contracts where there is no provision for adjustment of contract prices due to change in law or unforeseen conditions, we see increase in project costs in the upcoming taxation structure which will have to be borne by the developers leading to reduction in their profitability margins. The plants which sell power in the merchant market will also not be able to sell power at increased rates because of the falling power rates in the spot market. Need to Include Electricity under GST Umbrella Under the international model of GST implementation, Electricity is taxed as a normal good and consumers get full credit of GST. However in India, the current GST structure has been kept for sale/consumption of electricity out of its net thereby depriving the industry and consumers with the possible benefits of GST. Concerns of the industry over GST implementation need to be addressed before the final implementation of GST takes place. Now, it is upto the policy makers to address the issues related to increase in costs and the possible contract disputes post the implementation of GST. Project awarders and developers must start to work now to check the financial viability of their projects post the GST Regime to safeguard their interests and at the same time pass the benefits from the single taxation regime to the end consumers. Also, the power projects are long term projects where concept of commissioning stretches over a long period of time. Ambiguity remains over the taxes to be paid in case of projects which started in the Pre-GST era and get completed in the Post GST era. Electricity is a sensitive topic and it is important to retain the profitability and viability of the developers who have invested and who are planning to invest in the country while at the same time provides reliable and affordable power to all. The objective of GST gets defeated if any sector is excluded from its umbrella.Infraline Energy believes that electricity should be included under the GST bracket so that the objective of GST of removing the cascading effects of the taxation reach to the end consumers and the complete benefits from this landmark reform can be passed onto the country’s economy. InfralineEnergy Disclaimer: The views expressed here are solely those of the author in his private capacity and do not in any way represent the views of the InfralineEnergy (Technologies India Pvt. Ltd.). The organization is not liable for any use that may be made of the information contained therein and any direct/indirect consequences resulting therefrom.
Need for GST
Goods & Services Tax (GST), the combined goods and services tax and the strongest economic reform in the country after 1991, will subsume all the indirect taxes on goods and services imposed by the Centre and the State under a single umbrella. GST is aimed at simplifying the taxation regime, doing away with multiple/cascading effect of taxations on the final price of a product and thus will bring in efficiencies in the country. There might be some heartburn’s like inflation in the early days of implementation of GST but GST will improve GDP of the country in the long run.
However, uncertainty prevails over the date of rollout of the GST programme due to the lack of clarity on a number of issues related to GST implementation. Though the tentative date of GST implementation is 1st July 2017 (which may be extended to 1st October, 2017), we are still lagging behind in evolving a general consensus before its implementation.
Advantages of Goods & Services Tax (GST)
Impact of GST on Power Sector
Increase in Cost of Power Projects
Long term power contracts may or may not have provisions to deal with changes in laws and taxes. Amended tax rates on the input side would impact project costs (capital costs & operational costs) and pricing would need to be reworked after taking into account the change in tax structure.
Power Sector pricing is subject to the approval from the Electricity Commissions and implementation of GST might lead to piling up of input tax credits which will not be set-off against the end product, leading to increase in project costs. This would hurt the profitability of the developers especially if they are not able to pass the increase in costs of the projects to the buyers.
Doing Away with Concessions/Exemptions applicable to the Power Sector
Considering the role of power sector in the development of the country’s economy and to boost investments in the sector, both the Central and the State Governments have been providing a no. of exemptions/concessions for setting up power projects. The Model GST Law is silent regarding the status of concessions/exemptions applicable to the power sector in the new GST Regime.
The Model GST Law is silent on concessional 2% rate applicable for inter-state procurements by entities engaged in the production and distribution of electricity which helps them cut costs. In the possible scenario of doing away with these concessions/exemptions, cost of power projects are likely to escalate further.
Re-negotiation of the Existing Power Purchase Agreements (PPAs)/Power Contracts
Power Purchase Agreements (PPAs) provide for pass through of increase in project costs to the buyers under relevant clauses of the PPAs. However, in case of PPAs/Contracts where there is no provision for adjustment of contract prices due to change in law or unforeseen conditions, we see increase in project costs in the upcoming taxation structure which will have to be borne by the developers leading to reduction in their profitability margins. The plants which sell power in the merchant market will also not be able to sell power at increased rates because of the falling power rates in the spot market.
Need to Include Electricity under GST Umbrella
Under the international model of GST implementation, Electricity is taxed as a normal good and consumers get full credit of GST. However in India, the current GST structure has been kept for sale/consumption of electricity out of its net thereby depriving the industry and consumers with the possible benefits of GST.
Concerns of the industry over GST implementation need to be addressed before the final implementation of GST takes place. Now, it is upto the policy makers to address the issues related to increase in costs and the possible contract disputes post the implementation of GST.
Project awarders and developers must start to work now to check the financial viability of their projects post the GST Regime to safeguard their interests and at the same time pass the benefits from the single taxation regime to the end consumers.
Also, the power projects are long term projects where concept of commissioning stretches over a long period of time. Ambiguity remains over the taxes to be paid in case of projects which started in the Pre-GST era and get completed in the Post GST era.
Electricity is a sensitive topic and it is important to retain the profitability and viability of the developers who have invested and who are planning to invest in the country while at the same time provides reliable and affordable power to all.
The objective of GST gets defeated if any sector is excluded from its umbrella.Infraline Energy believes that electricity should be included under the GST bracket so that the objective of GST of removing the cascading effects of the taxation reach to the end consumers and the complete benefits from this landmark reform can be passed onto the country’s economy.
InfralineEnergy Disclaimer:
The views expressed here are solely those of the author in his private capacity and do not in any way represent the views of the InfralineEnergy (Technologies India Pvt. Ltd.). The organization is not liable for any use that may be made of the information contained therein and any direct/indirect consequences resulting therefrom.
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