GST revamp: Generation cost of solar plants may drop by 10 paise per unit

The GST rationalisation is expected to lower solar power generation costs by 10 paise per unit & reduce wind energy generation costs by Rs 15-17 paise per unit, accelerating India's energy transition

Goods and services tax (GST) rationalisation has come as a major boost for India's energy transition as the reduced 5 per cent rate on renewable energy (RE) equipment is likely to result in a 10 paise drop in the cost of generation from solar plants, and ₹15-17 paise per unit fall in the same from wind energy projects.

 

"The rationalisation of GST rates for solar Photovoltaic (PV) modules and wind turbine generators is expected to reduce the capital cost for solar and wind power projects by 5 per cent. This would also likely reflect in upcoming bids. This, in turn, will benefit power distribution companies in the form of lower power purchase cost," said Girishkumar Kadam, senior vice president & group head, Icra Ltd.

 

Industry executives said the rationalisation reflects the government’s commitment to clean energy transition. The reduction of GST rate on RE devices and equipment, and the resultant dip in project cost will accelerate capacity addition needed to meet clean energy targets.

 

"The change — reduction of GST on RE equipment from 12 per cent to 5 per cent — sends a strong signal to investors, improving financial viability and attractiveness of the RE sector, and at the same time it will directly help reduce the overall cost of solar modules, which can be passed on to consumers," said Amit Paithankar, chief executive officer (CEO) & whole-time director, Waaree Energies Ltd.

 

Paithankar added that Waaree is committed to passing on these benefits to customers, and while the exact reduction will depend on project specifications and configurations, customers can expect a tangible decrease in module prices, further strengthening the case for solar adoption.

 

Apart from the lowering of project costs, the rationalisation will enhance the financial viability of solar, wind, battery storage, and green hydrogen solutions, accelerating their adoption across industries and households. The new rate may temporarily deepen the issue of inverted taxation, but industry leaders said the government’s focus on faster input tax credit (ITC) refunds will help address this.

 

However, the lower tax burden may present a few short-term challenges for the industry. "Developers of projects awarded prior to this rate change will face complexities of renegotiating existing power purchase agreements (PPAs) under ‘Change in Law’ clauses. The accumulated ITC on capital goods could lead to one-time blockage of working capital, a hurdle that the industry would pass through, given the holistic positive change," said Saurabh Agarwal, tax & new energy partner, EY India.

 

The GST Council has recommended bringing coal, which previously attracted 5 per cent rate along with a ₹400/tonne compensation cess, under 18 per cent GST. GST on oil & gas exploration services is also seen rising from 12 per cent to 18 per cent. This will raise operational costs for traditional energy producers and subtly incentivise a shift toward cleaner energy alternatives, according to Manoj Mishra, partner and tax controversy management leader, Grant Thornton Bharat LLP.

 

“Equally significant is the resolution of the long-disputed deemed 70:30 valuation for EPC (engineering, procurement, and construction) contracts, which had created compliance uncertainty and litigation for renewable projects. By providing clarity on both taxation and valuation, the Council has enhanced cost competitiveness, reduced capital intensity, and strengthened investor confidence," Mishra said.

 

The GST rate on electric vehicles (EVs) remains the same at 5 per cent but the tax rate for fuel-cell vehicles has been cut from 12 per cent to 5 per cent, in a move aimed at boosting use of green hydrogen-fuelled cars, buses and trucks. Similarly, while the GST for lithium-ion batteries remains the same at 18 per cent, the rate on non-lithium-ion batteries, including lead acid and sodium-ion technologies, has been cut from 28 per cent to 18 per cent.