Feb 2016

Union Budget Highlights for Solar

The Finance Minister of India presented the Union Budget for the financial year 2016-17, early last week. Lack of initiatives by the government for the solar sector has been disappointing. The sector has got lost amongst government’s other priorities.

The relevant announcements from the Union Budget 2016 for the solar sector include:

  • Doubling of cess levied on coal production from INR 200/tonne to INR 400/tonne on coal – this cess, estimated at INR 280 billion for FY 2017, was originally dedicated to funding clean energy initiatives, but its scope is now widened to cover all environmental projects.Impact on Kalpa Customers – The electricity tariffs are expected to increase with the doubling of cess on coal production causing an increase in tariff rates on the customers. Solar power will be commercially viable when compared to conventional power plants as effective tariffs go above Rs. 6/unit.
  • The accelerated depreciation provided under IT Act will be limited to maximum 40% from April 2017.Impact on Kalpa Customers – the impact of this change will be felt on short term, where most of the customers will avail this benefit in FY2016-17. Solar rooftop is likely to see a boost this year before this benefit is halved.
  • Sunset clause under the section 80 IA (10 year tax holiday for power generation, transmission and distribution investments) till March 2017 has been maintained.Impact on Kalpa Investors – this announcement is likely to motivate the investor to invest and commission solar rooftop plants in FY 2016 to avail tax holiday prior to March 2017.
  • Increase in effective service tax rate through an additional 0.5% cess. 5% concessional basic customs duty (BCD) imposed on solar tempered glass (anti-reflective coated), subject to actual user conditions.Impact on Kalpa Customers - This announcement is likely to have a marginal negative impact on EPC and O&M services. The cost of solar is likely to increase marginally with increase in effective service tax rate and 5% BCD on solar tempered glass.

Overall, the budget has not been as per expectations set by the solar industry. With increase in electricity tariff rates this year caused due to doubling of cess in coal production, reduction of accelerated depreciation rate to 40% from April 2017, sunset clause under section 80 IA, we feel that 2016 is the right time to invest in solar and avail benefits with immediate effect.

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