India’s recently announced GST rate cuts and the Bachat Utsav are definite motivators to spur consumer buying, but is there a fine-print for the energy sector?

Byline: Hiren Pravin Shah, CEO of Replus Engitech

India’s clean energy sector stands at a critical juncture following significant GST rate reductions on renewable energy equipment and services. The government’s decision to lower tax burdens reflects its commitment to achieving 500 GW of renewable capacity by 2030 and net-zero emissions by 2070. These reforms have already begun reshaping project economics, making solar panels, wind turbines, and energy storage systems more affordable for developers and consumers alike. While it’s a welcome move, we should mention that energy storage systems (ESS) should also have been included in the clean energy GST tax slab—currently, ESS attract 18 per cent GST, compared to 5 per cent for other clean energy components.

However, the transition isn’t without complexity. Industry stakeholders now face new compliance requirements, input tax credit adjustments, and supply chain realignments. While the reduced rates promise to accelerate clean energy adoption, they also demand strategic adaptations from manufacturers, developers, and service providers. The success of these tax reforms will ultimately depend on how effectively the sector leverages opportunities while managing operational challenges.

Unlocking Investment
Fundamentally, GST rate cuts have altered economics of clean energy projects across India. Solar equipment now attracts a GST rate of just 5 per cent , down from the previous 12-18 per cent on various components. This reduction translates to immediate cost savings of 7-13 per cent on project capital expenditure, making renewable energy installations significantly more competitive against conventional power sources.

A government estimate finds GST cuts would not only reduce the levelized cost of energy but also boost investor confidence. The finding states that even at a modest 2–3 per cent cost reduction, Rs 1–1.5 lakh crores in investment capacity could be unlocked. That besides, avoiding an additional 50–70 million tonne of CO₂ emissions per year by 2030.Such improved economics particularly benefit rooftop solar installations, where cost sensitivity among residential and commercial consumers has traditionally been a major barrier.

Wind energy projects have experienced similar benefits, with turbine costs reducing by approximately 8-10 per cent due to lower GST rates on components and installation services. This cost advantage has enabled Indian wind developers to bid more aggressively in government auctions, with recent tariffs touching record lows of Rs 2.43 per unit. The enhanced competitiveness positions India’s renewable sector to attract larger global investments and technology partnerships.

Compliance Complexities and Operational Adjustments
At one end, a lower taxation boosts consumer confidence, there could be some challenges around operational adjustments and navigating comliance complexities. A transition within GST is likely to create some challenges with regards to either adopting newer accounting standards or even complying to avoid input tax credit mismatches for companies with existing inventory purchased at higher tax rates. A number that has been floating around in industry circles is an estimate of Rs 15,000-20,000 crore worth of input tax credit adjustments across the renewable energy value chain.

Additionally, supply-chain realignments would become necessary as manufacturers and suppliers adapt to new tax structures and new MRPs. The cycle of creating and reporting of these additional resources may take some time and may also require newer processes. A transition phase evidently throws some surprises. Particularly, smaller players are likely to face some challenges with an old industry estimate stating that bulk of small and medium enterprises faced increasing compliance costs during a transition period.

A Bold Move To Transition
However, in a period where average power tariffs across the renewables spectrum have seen a decline, such complexities and irregularities are manageable. While the latest policies are a bold step towards renewable transition, success isn’t merely guaranteed with policy announcements. Some immediate benefits such as lower project costs, improved returns, and enhanced competitiveness will be reaped; however what makes this policy sweet is how the the industry navigates the compliance complexities and operational adjustments.

Large developers with strong financial resources can navigate challenges relatively easily, but for a pan-India success, the ought to be on ways for the policy to reach MSMEs and the end-consumers. For success at a grass-root level, there needs to be a clear implementation guidance and support mechanisms too are likely to be crucial.

Similar to real estate where a GST cut is likely to enable a revision in the range of 1 to 1.5 percent, GST revision would have a beneficial impact on clean energy sector too. But the litmus test this time would be to check if India can maintain this momentum while ensuring no new barriers emerged – those that add new commplexities. While many have called the GST rate cuts a policy-gamble, it’s a catalyst to India’s clean energy ambitions.

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the publication.