GST Cuts on Green Energy Inputs Set Stage for Faster Growth

The 56th GST Council meeting with its landmark decisions marks a monumental and proactive step towards shaping India’s sustainable future. As the country moves steadily towards its ambitious climate goals, this bold and commendable GST rate rationalisation for the new energy sector signals a clear intent from the government to foster a conducive and competitive environment. It is a strong display of the government’s trust in the industry to drive growth and meet the nation’s energy needs.

This move is not merely about tax adjustments; it is a foundational reform aimed at systemic change. By simplifying the tax structure and reducing rates on essential components the government is addressing a long-standing demand of the industry.

The reduction in GST on renewable energy devices, PV cells and solar panels from 12% to 5% is a game-changer. It will directly translate into lower procurement costs for developers and Engineering, Procurement and Construction (EPC) contractors, making projects more financially viable and attractive for investment.

Furthermore, the rationalisation of rates on allied inputs such as the reduction of GST on cement from 28% to 18% creates a ripple effect of positive impact. These measures will significantly lower the overall cost of allied civil works and other project development expenses. The combined effect is a reduction in the total cost of renewable energy projects which will in turn put downward pressure on tariffs in future power purchase agreements. This benefits not just the industry but also the end consumer.

The table below illustrates the impact of the recent GST rate rationalisation on various categories of goods: 

As with any major policy shift the industry may face certain short-term teething issues. Stakeholders will need to navigate new contractual dynamics particularly considering the "change-in-law" clauses in Power Purchase Agreements (PPAs).

Developers and EPC contractors will have to engage in proactive negotiations to ensure the benefits of lower costs are equitably passed on. However, these are challenges that the industry known for its resilience and adaptability will certainly overcome. The overall impact remains overwhelmingly positive and these initial complexities are a small price to pay for the long-term benefits of a simplified and more efficient tax regime.

The GST cut on ammonia is particularly promising for green hydrogen adoption as an alternative fuel. Looking ahead, policymakers may consider differentiating between green hydrogen and conventionally produced hydrogen for targeted support.

To fully leverage this opportunity, companies should:
• Revisit existing contracts and PPAs to align terms with the new tax regime.
• Update financial models and bidding strategies to incorporate cost savings.
• Engage openly with contractors and subcontractors to ensure fair distribution of benefits.
• Align procurement timelines with the effective date of revised rates to maximise savings.

In conclusion, GST rationalisation is set to reduce production costs, enhance competitiveness, stimulate industrial growth and accelerate India’s transition toward a cleaner energy future. By lowering barriers and fostering collaboration this reform strengthens India’s position as a global leader in green energy.