India: Customs Duty And GST - Classification Of Solar Power Projects

Last Updated: 14 December 2018
Article by Shashwat Kumar

The Central Goods & Services Tax Act, 2017 ('CGST Act') and related legislations received the assent of the President on 12.04.2017 and came into force on 01.07.2017, by way of Notifications No. 9/2017, 12/2017 & 13/2017 ('GST Law'). The GST Law subsumes multiple taxes and duties which were levied by the Central and State Governments on goods and services. Pursuant to the introduction of GST Law, solar power projects are now subject to the GST which ranges from 2.5% to 28% tax bracket as per the GST rate schedule for goods issued on 18.05.2017 and as amended from time to time.

In addition to the imposition of GST, the import of solar modules also witnessed a shift in the interpretation by the Customs Department. As per the existing law (i.e. Notification no. 01/2011 dated 06.06.2011), customs duty on import of solar modules is waived off as it is classified under Customs Tariff Heads ('CTH') 8541 4011 which reads as 'Diodes, transistors and similar semi-conduction devices, including photovoltaic cells whether or not assembled in modules or made up in to panels; light emitting diodes, mounted piezo-electric crystal'. The Customs Department started taking a view that the above definition excludes modules equipped with elements, such as diodes and produce DC power which can be directly connected to the load, hence mandating classification of solar modules under CTH 8501 3120 which reads as 'Electric motors and generators' and hence imposing 7.5% customs duty on modules.

This article provides an overview of these two issues which impact the solar power developers.

Impact due to GST

The new GST Law has brought about fundamental structural changes in the prevailing tax regime in India and has affected the various parameters upon which developers had submitted their bids. The change in the taxation regime affected the capital cost of the projects as the rate of taxation on the equipment i.e. the solar cells, modules etc., required for setting up the projects increased, thereby resulting in escalation in the capital cost of the projects. Under the GST Law, various aspects of solar power projects were placed under the 5% to 28% tax bracket as per the GST rate schedule for goods issued on 18.05.2017 and as amended from time to time. It may be noted that such an increase in taxes from zero up to 28% has increased the capital cost of the developers significantly, making the tariff quoted at the time of submission of the bids unviable.

While the present GST Rate Schedule provides that a GST of 2.5% is applicable on renewable energy devises and parts used for setting up of solar power generating systems ('SPGS'), the GST Department has been taking a different view and taxing various input good and services at a higher rate. This has cause a serious cost issue for the solar power developers.

The Ministry of New Renewable Energy ('MNRE'), through its letter dated 03.04.2018, clarified that a 5% concessional GST rate for goods falling under Chapters 84, 85 or 94 should be applicable if supplied for manufacturing of SPGS. Further, other goods supplied in construction of SPGS, through Engineering, Procurement and Construction contracts ('EPC Contracts'), can also be given the concessional 5% GST if the other goods are treated as composite supply under the CGST Act, with supply of SPGS as principal supply.

However, this issue was further escalated by certain orders passed by the Authority for Advanced Ruling (constituted under the GST Laws) while considering the applicable GST rate on the EPC Contracts entered into by certain Solar Project Developers ('SPDs'). EPC Contracts are special types of contracts entered in to by an EPC contractor to designs the project, procure the necessary supplies and finally carry out the construction of the project. These contracts can be classified as work contracts under the CGST Act if they are in relation to an immovable property.

In order to determine the GST of SPDs, for development of solar PV power projects, the Maharashtra and Karnataka Authority for Advanced Ruling ('AARs') have stated in its rulings that EPC contracts with SPDs would attract 18 % GST since Solar PV plants are immoveable properties, therefore fulfilling the criteria of work contracts under the CGST Act. Further, it was held that separate contracts entered for supply of equipment and engineering & construction of solar power plants were to be taxed at 18 %. The above two contracts had to be treated as a single works contract for setting up a solar power plant. The AARs also clarified that sub-contracting of goods and services to set up solar power plants would not attract the 5% concessional rate as proposed by the MNREs. Although the rulings of the AARs are only binding on the respective parties they provide a clearer picture on how solar power plants are to be taxed under the current GST regime.

Impact on existing projects due to Customs Duty

The issue with respect to the Customs Duty is in relation to classification of solar PV modules which is whether imported solar modules will be classified under CTH 8501 as is being claimed by the Customs Department or under CTH 8541 as claimed by the importers/solar power developers. The relevant heads are described as under:

8501

Electric motors and generators (excluding generating sets)

8541

Diodes, transistors and similar semiconductor devices; photosensitive semiconductor devices, including photovoltaic cells whether or not assembled in modules or made up into panels; light emitting diodes; mounted piezo-electric crystals


Classification under the CTH 8541 also covers solar cells, whether or not assembled in modules or made up into panels. However, the heading does not cover panels or modules equipped with elements, however simple, (for example, diodes to control the direction of the current), which supply the power directly to, for example, a motor.

Accordingly, the developers argue that on the basis of the explanation given under CTH 8501, solar modules on stand-alone basis will not qualify as DC generators under CTH 8501. Only those solar modules coupled with one or more of these items: voltage regulator, charge-controllers, batteries or inverter will become capable to be used as a DC generator. For example – Solar-lights / lanterns, solar chargers / charging station, solar fan, solar pump etc.

Further, in a press article it was stated that the Minister for New and Renewable Energy, Shri Raj Kumar Singh, has complained to the Finance Minister that customs officials are demanding duty on imported solar equipment, which has led to ports getting jammed with shipments and has jeopardised the prime minister's flagship programme of accelerating renewable energy projects. The article quotes, from the letter written by Shri R K Singh to the Finance Minister, as follows:

'There is no doubt that panels and modules are used for generating electricity – but they are used for generating renewable energy and that is why the government took a conscious decision that they should be allowed to be imported without any customs duty' (...) 'The officers concerned do not seem to have grasped this distinction.'

'I shall be grateful if officers are directed that photovoltaic panels/modules being imported for solar power generating system/plants be allowed to be imported under the nil rate of duty... as has been done so far'.

The Customs Department was of the view that solar modules are correctly classifiable under Heading 8501 as they feel that solar modules should be classified as a generator.

This issue was finally resolved with the issuance of the instructions by the Central Board of Indirect Taxes and Customs (CBIC) on 06.04.2018. As per the said instructions (a) if the solar panels or modules are equipped with bypass diodes, they are to be classified under CTH 8541; and (b) if the solar panels or modules are equipped with blocking diodes or with blocking diodes and bypass diodes, they are to be classified under CTH 8501.

Conclusion

With the imposition of GST, there will be some impact on the tariff of the solar power projects as the developers' factor in these additional costs. The time loss caused by the disruption due to GST is also to be considered. As of now, to mitigate the impact of introduction of GST, on upcoming solar power plants, the MNRE has issued an Office Memorandum (dated 20.06.2018) to extend the scheduled commissioning date of projects. The MNRE has considered the issue that temporary business disruption and consequent delays have occurred due to the introduction of GST. Pursuant to this consideration, the MNRE has given an extension of up to two months for commissioning date to projects which have been affected by disruption.

With respect to projects which were awarded prior to the imposition of the GST, although the impact of levy of GST and Customs Duty may be addressed by a 'change in law' clause in the Power Purchase Agreements, however claiming relief under the clause is a tedious process. The exercise of filing a petition before the Appropriate Electricity Regulatory Commission to ascertain the revised tariff is a time-consuming process with no certain outcome.

Authors: Shashwat Kumar is a Partner with the Firm's Projects Infrastructure and Energy Practice. He has considerable experience on power and regulatory matters. Supported by Avani Tewari, Associate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions