India supports renewable energy development by cutting taxes on solar panels and wind turbines

India is grappling with developers delaying decisions on building more renewable energy capacity. With projects totalling 44 GW of installed capacity stalled in the country, lawmakers have decided to cut the value-added tax and get the market moving.

India's government on Wednesday cut the country's equivalent of value-added tax on solar photovoltaic modules and wind turbines from 12 % to 5 % as part of broader tax relief covering hundreds of consumer goods.

The aim is to reduce the cost of new power plants and put pressure on developers of existing projects to lower tariffs, accelerating the country's transition to renewable energy.Reuters reports.

Decarbonisation plans

We have already reported, based on data from Ember, that India needs to introduce some form of support for renewables. The country has declared that it will expand its non-fossil capacity to 500 GW by 2030. Last year, investment in renewables and the electricity grid reached around USD 13.3 billion, yet the country is still not on track to meet its targets.

Reducing capital costs was one of the key factors identified by Ember as determining the success or failure of renewable energy development in India. Other analysts are now confirming this.

“Cutting taxes on solar photovoltaic modules and wind turbine generators should reduce the capital costs of solar and wind projects by around 5%,” said Girishkumar Kadam, senior vice president and group head at ratings agency ICRA.

The tax change presents several short-term challenges, as projects awarded before the tax cut may require existing power supply agreements to be renegotiated, according to Saurabh Agarwal, tax and new energy partner at EY India.

Getting projects moving

Oyster Renewable Energy said the lower tax rate would allow developers to re-engage with power companies on more competitive tariffs, potentially unlocking stalled projects.

Developers who have not yet purchased equipment will likely have to pass on the tax benefits to consumers through lower tariffs, while those who have already paid the higher rate may justify existing tariff agreements by submitting documentation to the federal regulator, said Sanjeev Aggarwal, founder and executive chairman of Hexa Climate Solutions.