GST GST Impact on Energy Sector

GST Impact on Energy Sector

If the economy needs to grow then one of its main drivers is the energy sector which, however, is currently affected by policy paralysis and regulatory hurdles. The biggest issue of indirect taxes that eat into the profits in this sector has sadly continued into the Goods and Services Tax (GST) as well. The production of electricity and its sale has been kept outside the GST however, the capital goods and services that are the inputs of this sector are been kept inside the GST.

The path of GST is not too good for the health of energy sector as most of the tax concessions and exemptions that are provided by both the Central and State level are available on specific goods and services which are used in the energy sector. However, with the onset of GST, these tax rebates will see a reduction and will greatly affect the performance of energy sector.

The Impact of GST

Cost Escalation of Projects

Tax Exemptions and Concessions: The input raw materials and services that are required in the making up of the energy projects do come under the purview of the GST, although they will be chargeable for the generating companies which will lead to cascading of the indirect taxes. The current scenario of taxation in this sector provides for concessions for projects related to energy generation. However, with the advent of the GST, there is no clarity as what would be the way forward for concessions and exemptions. The present scenario is amicably supportive of creating new projects and setting up of companies in the energy sector.

The inter-state procurement and removal of the concessional rate under EPC contracts: To reduce the tax cost, the companies are using the inter-state sales route to reduce the tax costs. The concessional reduction of about 2% in tax is achieved in this way. The procurement is achieved accordingly and rebates are achievable through this strategy routing through the inter-state sales. The manufacturer also benefits from the inter-state transit for the subsequent sales. The second sale if made along the inter-state transit provides the same benefits as with the first point of sale of electricity and procurement of raw materials for the generation of electricity and setting up of the unit. However, with the advent of GST law, this concession might not be given to the sector. The clarity of thought and implementation is absent in the working of GST law leaving much to explain.

In such an environment, the loss could be significant and the absence of tax concessions and exemptions could lead to higher input costs. This might plague the sector in the coming years if not rectified or clarified early on.

State of Renewable Energy

The setting up of renewable energy projects to too high when compared to conventional energy setups. This leads to higher initial costs for the renewable energy. The governments around the world have been encouraging the use of clean energy and this led to tax concessions in this field. This has resulted in the reduced cost of clean energy production. With the coming of GST, it is unclear as to whether this kind of tax breaks will be further provided to the clean energy sector. This will lead to issues regarding cost escalations and unwanted stagnation in the clean energy field. The clean energy needs the support of the support of the government to successfully implement and take forward the agenda of the clean energy requirements. If the government continues to provide the tax concessions under the GST regime, then this would take the clean energy out of the limbo of uncertainty regarding its future in India.

Power Purchase Agreements

The Power Purchase Agreements are there to provide a pass through for the current indirect taxes by incorporating the costs as the contract price. The PPAs let the prices to be adjusted according to the increase in the tax rates. This leads to better management of costs. These are done through clauses under the PPAs such as the “Change in Law” or “Force Majeure”.

GST is a change of law and any change in GST will lead to higher contract prices. This means there will be higher costs to operate.


The energy sector is the most important sector in India right now and if implemented correctly can lead to a better future. The energy is at the core of everything that we do in an economy. From the generation of income to the cost incurred in the welfare of the population. Everything solely depends on how the energy requirements are fulfilled in the country. India needs to create more roads and expand its infrastructure if it wants to win in the 21st century but without meeting its energy targets this will remain a dream forever. The GST can play a spoil sport if the tax exemptions and concessions are not explained well before time. The time wasted in explaining the outcomes and the impacts of GST on energy sector will further degrade the investor confidence. To not to let this happen the government need to take some concrete steps and explain to this already plagued sector all that remains to be done.

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