Industry

Renewables sector's Budget wish list: More power to a greener future


Renewable sector in India has seen significant evolution and growth in the past few years with the government laying major emphasis on development of clean energy sources. The sector is one of the major contributors to infrastructure development in India and with the newer emerging themes (Green Hydrogen, Storage, Electric Vehicles, Solar Cell and Electrolyser Manufacturing, etc), it is leading the way for sustainable development and creating a better future.

According to publicly available data, since March 2014, the sector has seen a growth of 2.73 times in total installed renewable energy capacity in the country. In line with its announcement at COP26 climate summit in Glasgow to increase the non-fossil energy capacity to 500GW by 2030, coupled with the target to become a net zero carbon emitter by 2070, India is set to push the pedal to accelerate the pace of development. Union Minister for Power and New and Renewable Energy, Mr R K Singh, has already commented that investment in renewable energy sector is expected to cross $15 billion in 2022. One can expect this number to rise in the coming years if India is to meet the above target and attracting patient foreign capital is pivotal.

The government has taken significant steps towards this end by easing our regulatory and tax policies. Amongst others, tax exemption to Sovereign Wealth Funds (SWFs) and Pension Funds (PFs), lower tax rate of 15% to new power companies, abolition of dividend distribution tax, etc, have been well appreciated by the investor community. Streamlining of Infrastructure Investment Trust (InvIT) regulations alongside the agenda of monetizing some of the marquee infra assets through this route, has certainly boosted investors’ confidence and paved the way for successful evolution of this alternate investment route for foreign investors.

Despite laudable measures undertaken by the government, the sector still continues to face challenges on the tax front. Budget 2022 provides a unique opportunity to the Government to address some of these concerns, given the uptick in the economic activity (post pandemic lows) and with global investors looking to invest significant capital in emerging markets. Outlined below are some of the specific areas which, in our view, are on the watchlist of key stakeholders in the renewable energy space vis-à-vis the upcoming Budget:

  • Investment based tax incentives for companies in electric vehicle manufacturing/charging business to give boost to the EV sector.
  • Incentivising R&D, technology adoption and investments in the storage segment.
  • We have seen India’s first SPAC for renewable group last year. Renewable groups are looking at alternate sources for growth capital as well as providing exit to their investors. Direct overseas listing route was announced by the government last year. However, the rules and regulations for the same are still under works. Companies which are looking to raise funding through the listing route are expecting more clarity on the road map for direct overseas listing regulations and relevant tax laws.
  • Tax consolidation scheme for renewable companies is the need of the hour. By its very nature, a renewable group has multiple entities, and each entity is taxed separately leading to additional tax liability on account of inability to set off losses, tax credits within the group, complexities around intra-group transactions, multitude of compliances, etc. Fund mobilisation within the group becomes a key pain point on account of certain tax issues. Providing tax consolidation for renewable companies will go a long way in addressing some of these issues and provide significant ease of doing business for such companies.
  • It would be helpful if GST rates on renewable-solar projects are retained at 5 per cent, as was originally notified during the implementation of GST. Alternatively, the GST Council’s stipulation of the deemed 70:30 ratio on contract value for GST computation at 5 per cent and 18 per cent respectively could well be changed to the applicable 90:10 ratio. This is because in solar projects, material accounts for 90 per cent of the value of the contract wherein the service component is only to the extent of 10 per cent. This will help rationalisation of GST tax rate to 6.3 per cent vis-à-vis current tax rate of 13.8 per cent.
  • The government should consider deferring levy of Basic Customs Duty on imported modules (which otherwise is effective from 01 April 2022), and instead provide relevant subsidies/incentives/tax concessions to the domestic module manufacturers thereby driving global competitiveness for the domestic players, without disrupting the demand-supply situation for modules and the current generation pipeline of IPPs.
  • In relation to InvITs, the government would do well to clarify the availability of tax treaty benefit on dividend income distributed by InvIT to non-resident shareholders. The same will provide more certainty to the non-resident investors on tax assumptions vis-à-vis dividend returns from InvITs. Also, the period of holding for the listed InvIT units should be brought at par with the listed shares to provide a level playing field for the listed InvITs as compared to listed companies.
  • Rationalisation of some of the conditionalities attached to tax exemption provided to SWFs and PFs and coming up with specific explanatory rules is much awaited, as is the need for waiving the withholding tax applicability on payment of income to such Funds by the InvIT.

The government can certainly help accelerate the growth of the sector in 2022 and beyond, by incentivising the industry and rationalising the overall regulatory, fiscal, tax and financing framework for the sector. Addressing some of the abovementioned industry issues could offer new impetus for investments and contribute towards ease of doing business in India, thereby instilling investor confidence, and fueling more investment into the sector.

India has shown character with a base that is getting stronger year on year and is “systematically” unleashing itself towards creating a destination which shall meet investment philosophies confidently. So, the interpretation of the budget when it comes and the pre-budget expectations that have been listed should be viewed in the backdrop of creating an “investment climate” that supports a greener future and sustainable development.

The author is Partner – Tax, KPMG in India.



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