Regulatory policy

Here is a Tax Policy Roadmap for India’s Net Zero Commitment

Climate change is among the top five concerns of CEOs, according to PwC’s 2022 Annual Global CEO Survey, released a few days ago. The survey also revealed that up to 22% of global companies and 27% of Indian companies have made a net zero commitment. Regardless of who drives the climate change agenda, be it the board of directors, shareholders, government or non-governmental organisations, investors or consumers, it is clear that there is an unequivocal commitment to India Inc towards this goal as part of their overall ESG strategy. strategy.

During the COP 26 Summit in Glasgow on November 2, 2021, the Prime Minister proclaimed the five-ply strategy of “Panchamrit” as India’s path to tackling climate change. While four of them, namely promoting the use of renewable energy, improving the energy capacity of non-fossil fuels, reducing carbon emissions and carbon intensity would be achieved by 2030 , India would achieve the goal of Net Zero by 2070. Since India’s net zero goal was clearly set by none other than the Prime Minister himself, it is expected that the the entire machinery of government will respect this commitment.

The Government of India has supported the clean energy movement by developing regulatory frameworks as well as providing incentives. Programs such as FAME 1 and FAME 2 for electric vehicles as well as PLI programs for electric vehicles, solar photovoltaic modules and advanced chemistry cell batteries play a vital role. Notwithstanding this, there is also an urgent need to formulate a holistic and predictable tax policy that is in line with India’s climate change agenda.

India’s transition from carbon subsidies to carbon taxes was examined in the Economic Survey 2014-2015. However, as India’s journey to Net Zero progresses, a recalibration of income is indeed needed to maintain sustainable levels going forward. Some developed countries have already started to feel the negative impact of falling revenue from fuel taxes and gas-guzzling vehicles, as electric vehicles gain traction. These countries are exploring alternative methods of increasing revenue in a world close to Net Zero, such as higher taxes on high-end luxury electric vehicles. India should also revise its strategy accordingly and also move towards a comprehensive carbon pricing policy.

The tax treatment applied to goods and services, which are relevant to promoting India’s commitment to increased use of non-fossil fuels, does not appear to follow a consistent and consistent path. For example, while the GST rate on electric vehicles and electric vehicle chargers is 5%, there is an 18% tax on electric vehicle charging services, which hinders the faster adoption of vehicles electrical. There is also some ambiguity regarding the SAC classification in the GST for this service, which needs to be clarified by the GST Board. Interestingly, the current debate over the consistency of tax treatment in the UK is also about the differential rate of VAT on electric vehicle charging. The UK public billing VAT rate is 20% (standard rate) compared to the domestic billing rate of 5%, which some say could lead to overloading the national electricity grid.

Given the current fiscal policies prevailing in the renewable energy sector, a major overhaul is required to achieve the government’s objective. India’s ambition is to meet 50% of its energy needs from renewable energies by 2030. Indeed, the NDC target for 2022 is set at 175 GW, while India hopes to reach 500 GW by 2030 instead of the previously proposed 450 GW. India’s tax rates on goods and services in this sector must be in line with these ambitious targets. Solar power generation is targeted at 100 GW by 2022 and is expected to increase sharply to around 280 GW by 2030. So as the solar power transition gains momentum, addressing the GST on solar power generation goods and services must also be properly aligned to match this aggressive growth. The sudden increase in the GST rate on critical components from 5% to 12% with controversial valuation principles may impact energy prices. No doubt the increase in tariffs on solar power modules and solar cells from April 1, 2022 is a step towards building an Aatmanirbhar Bharat. A calibrated increase might have helped a smoother transition to renewable energy.

The story is similar in the wind power sector, which is gearing up to hit 60 GW by 2022. Recently, the CBIC issued a stakeholder consultation note for a proposal, without citing reasons, to increase customs duties on several wind power generators. equipment and parts. Such proposals could be perceived as a lack of policy coherence and may not inspire much confidence within the climate finance community.

Regulatory bottlenecks such as obtaining a customs duty exemption certificate for each import shipment from the Ministry of New and Renewable Energy (MNRE) should be replaced with simpler import procedures such as those provided by the rules for importing goods at preferential tariffs (IGCR).

India’s power minister said the renewable energy sector brought in $70 billion in FDI over the past seven years. Last year, at the United Nations High Level Energy Dialogue, it was a proud moment when India was declared a “global champion of energy transition”. Yet the dizzying transition to Net Zero by 2070 will require greater investment in India. It is imperative that the Ministry of Finance prepares a strategic roadmap in line with the objectives of “Panchamrit” with very clear and stable fiscal policies to win the hearts and wallets of potential renewable energy investors. What better time than the 2022-2023 Union budget to set this in motion? Let’s wait and watch.

The author is Managing Director of Price Waterhouse & Co LLP and former Chairman of CBIC. The opinions expressed are personal.

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