12% GST on RECs: Renewable power companies move Delhi High Court

Renewable power companies have moved the Delhi High Court, seeking to exempt the renewable energy certificates (RECs) from the goods and services tax (GST). The case will also have implications on priority sector lending certificates, used widely in the banking sector. These certificates current attract a GST rate of 12 per cent.

The court on Tuesday issued notices to the Centre, the GST Council and the Central Board of Indirect Taxes and Customs in this regard. 

Explaining the case, Abhishek Rastogi, partner at Khaitan & Co. and counsel for the companies, said securities are defined as neither goods nor services under GST laws and hence are not  taxable under the indirect tax regime.

For this purpose, the definition of securities is taken from a provision under the Securities Contracts (Regulation) Act. 

Clause (h) of the section 2 of the Act defines securities as shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate derivatives.

RECs fall under the definition of securities, argued Rastogi. “These scrips are traded on IEX (Indian Energy Exchange) and PXIL (Power Exchange India Limited) and are electricity derivatives,” Rastogi said. 

RECs are widely used in the renewable purchase obligations by companies and states.

Launched in 2010, RPOs make it obligatory for distribution companies, open-access consumers and captive power producers to meet part of their energy needs through green energy. Pre-defined RPO target for all states, currently ranges from 3 per cent to 10 per cent of the total energy requirement of the states. RPO is divided in two parts- solar RPO and non-solar RPO.

The states or utilities that are unable to fulfil their RPO can buy RECs, which represents 1mw-hour of power produced from a renewable energy source.  

There are around 12,000 projects under REC mechanism with a total capacity of 5,383 MW. 

In March 2017, Central Electricity Regulatory Commission (CERC) reduced the REC prices to a historic low to match with prevailing tariffs. The floor price of Solar REC was reduced to Rs 1/unit and forbearance price to Rs 2.5/unit. It was earlier Rs 3.5/unit and Rs 5.8/unit, respectively. Whereas for the non-solar (wind power and others), the floor price was reduced to Rs 1/unit and forbearance at Rs 2.9/unit. It was earlier in the range of Rs 1.5-3.5/unit

Harry Dhaul, director general of the Independent Power Producers Association of India (IPPAI), said the taxability of REC will prove to be fatal for the power consumers by further increasing the costs of electricity.

The issue will have repercussion for priority sector lending certificates (PSLCs). These certificates are a tool for promoting comparative advantages among banks while they meet their priority sector lending obligations. Banks with a comparative advantage in lending to the priority sector earn these certificates, while those falling short of the target are required to buy these papers. 

PSLCs volume rocketed to Rs 3.3 trillion in FY19,up from Rs 1.9 trillion in the last financial year and Rs 50,000 crore in FY17.