[Opinion] Union Budget 2023: Bright Sun should have a Bright Future!

Authored by CA Naveen Wadhwa – DGM & CA Rahul Singh – Manager | Taxmann Advisory and Research

Table of Contents

1. What about India?

2. What is the World doing?

3. Need for tax incentives in India

4. Conclusion

Although China has the highest solar energy capacity, Morocco is globally recognized as a leader in this field. As of 2019, Morocco derived 35% of its electricity from renewable sources and aims to increase it to over 50% by 2030.

The use of solar power is rapidly gaining popularity and is an alternative to fossil fuels. This clean and environmentally friendly method of generating electricity has reached a point of commercialization and is ready to be adopted on a large scale.

As per an estimate, a solar panel typically generates around 15 watts per square foot of space. Thanks to India’s clear and sunny weather for 250 to 300 days a year. If solar panels are promoted in Tier-3 and Tier-4 cities, which have comparatively lesser space constraints in comparison to Tier-1 and Tier-2, the electricity generated can fulfil the needs of Tier-1 and Tier-2 cities.

At the COP 26 of the United Nations Framework Convention on Climate Change, the Indian Government announced ambitious new climate goals, including a goal to increase non-fossil fuel energy capacity to 500 GW and obtain 50% of their energy from renewable sources by 2030. However, the experts have expressed concerns that achieving these goals may be challenging.

1. What about India?

The economics of renewable energy in India has seen an improvement in recent years, with the Government introducing various schemes and providing subsidies to encourage the installation of solar systems.

However, as per the Central Electricity Authority of India, solar energy still accounts for only a small percentage of India’s overall electricity generation, with an estimate of around 7%.

To make solar energy more accessible and affordable in India, the Government should announce some tax benefits for both consumers and manufacturers in the upcoming budget. This article will delve deeper into the need for tax incentives to promote the rapid growth of solar energy in India.

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2. What is the World doing?

Many countries around the World have implemented a variety of incentives to encourage the adoption of solar energy. These incentives include subsidies, grants, exemptions from import duties, and direct & indirect taxes. These incentives help to reduce the costs associated with solar energy and make solar projects more attractive.

The USA gives a federal tax credit to taxpayers looking to go solar. The federal tax credit was introduced as part of the Energy Policy Act of 2005. It allows taxpayers to claim a credit on their federal taxes equal to 26% of the cost of installing a solar energy system. The credit is available for residential and commercial installations and can be claimed in the federal tax return.

In Germany, anyone operating a photovoltaic solar system with an output of up to 30 KW on a single-family home or commercial property will no longer have to pay income tax on the electricity yield from the beginning of 2023. The German Government approved this measure in its Annual Tax Act 2022.

In its ‘2023 Tax Plan’, the Netherlands abolished VAT on solar panels. Starting from January 01, 2023, zero per cent VAT is levied on solar panels if installed at homes or outbuildings of a home.

3. Need for tax incentives in India

To make solar power more affordable and accessible, encouraging more people to invest in it, the Government should amend the tax laws to provide some relief to taxpayers.

Under GST Act, there is no exemption on the manufacture or sale of solar panel devices or their parts. The solar devices are subject to a 12% tax rate. The GST rate for these items was previously 5%, but it was increased to 12% in 2021.

Similarly, India has increased the basic customs duty on solar imports up to 40% from April 1, 2022, following a period of decreased restrictions.

To keep renewable energy capacity additions on schedule and reduce consumer power tariffs, relief from these indirect taxes should be provided in the upcoming budget.

As far as Income-tax is considered, there is no specific exemption or deduction available either to consumers or manufacturers of solar panels. International examples such as the USA show that income-tax incentives can become a powerful tool in boosting investment in solar panels.

It is recommended that Govt. consider bringing some income-tax sops to boost the usage of solar panels.

Further, due to the high cost of solar panels, the subsidy provided by the Govt. may not be enough to make them more affordable for every consumer. Therefore, the Government should consider allowing a deduction for interest on loans taken out for purchasing solar panels.

In the 2019 budget, the Government brought a similar deduction by introducing Section 80EEB. This provision allows for a deduction of up to Rs. 1.50 lakh for the interest paid on loans taken for purchasing electric vehicles.

4. Conclusion

Tax incentives can play a crucial role in advancing India’s solar energy growth. It will support Indian companies and individuals who invest in it. It will also encourage the development of necessary infrastructure and promote the use of solar energy in rural and remote areas.

We have to wait till February 01, 2023, to see what the Finance Minister holds in her ‘bahi-khata’ for this industry.

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