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

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:

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.