Herre's a tax policy roadmap for India's Net Zero commitment

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

At the COP 26 summit in Glasgow on 2 November 2021, the Prime Minister proclaimed the five-nectared strategy of ‘Panchamrit’ as India’s path towards addressing climate change. While four of these, namely the push for renewable energy usage, enhancing the non-fossil fuel energy capacity, reduction in carbon emissions and carbon intensity would be achieved by 2030, India would achieve the target of Net Zero by 2070. Given that India’s Net Zero target was clearly laid down by none other than the PM himself, it is anticipated that the entire Government machinery would abide by this commitment.

The Government of India has been supporting the drive towards clean energy by developing regulatory frameworks as well as providing incentives. Schemes like FAME 1 and FAME 2 for electric vehicles as well as PLI schemes for EVs, solar PV modules and advanced chemistry cell batteries are playing a vital role. Notwithstanding these, there is also a dire need to formulate a holistic and predictable tax policy which is in sync with India’s climate change agenda.

India’s transition from carbon subsidy towards carbon taxes was examined in the Economic Survey 2014–15. However, as India’s journey towards Net Zero progresses, a revenue re-calibration is indeed needed to maintain sustainable levels in the future. Some developed countries have already started feeling the adverse impact of declining revenue from fuel taxes and gas-guzzling vehicles, as EVs gain ground. These countries are exploring alternative methods of revenue augmentation in a near Net Zero world, such as higher taxes on high-end, luxury EVs. India too should re-strategize accordingly and also move towards a comprehensive carbon pricing policy.

The tax treatment meted out to goods and services, which are relevant to promote India’s commitment towards greater usage of non-fossil fuel, does not appear to follow a coherent and consistent path. For instance, while the GST rate on EVs and EV chargers is 5%, there is a levy of 18% on EV charging services, which acts as a dampener to the quicker adoption of EVs. There is also some ambiguity regarding the SAC classification in GST for this service, which needs to be clarified by the GST Council. Interestingly, the current debate on consistency in tax treatment in the UK is also about the differential rate of VAT on EV charging. The UK’s public charging VAT rate is 20% (standard rate) as against the domestic charging rate of 5%, which some say could potentially lead to overloading the domestic power grid.

Given the current tax policies prevalent in the renewable energy sector, a thorough relook is needed to match the Government’s goal. India’s proclaimed ambition is to meet 50% of its energy requirements from renewable energy by 2030. In fact, the NDC target for 2022 is set at 175GW, while India hopes to achieve 500GW by 2030 instead of the 450GW proposed earlier. India’s tax rates on goods and services in this sector need to be in sync with these ambitious targets. Solar power generation is targeted at 100GW by 2022 and is bound to increase steeply to around 280GW by 2030. So, while the solar energy transition is gaining momentum, the GST treatment on solar power generating goods and services also needs to be suitably aligned to match this aggressive growth. The sudden increase in GST rate on critical components from 5% to 12% with contentious valuation principles may impact energy prices. No doubt, the customs duty hike on solar power modules and solar cells from 1 April 2022 is a step towards building an Aatmanirbhar Bharat. A calibrated increase would perhaps have helped in a smoother transition towards renewable energy.

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

Regulatory bottlenecks such as obtaining a Customs Duty Exemption Certificate for each import consignment from the Ministry of New and Renewable Energy (MNRE) need to be replaced with simpler import procedures such as those under the Import of Goods on Concessional Rates (IGCR) rules.

India’s power minister claimed that the renewable sector has fetched USD 70 billion worth of FDI in the last seven years. Last year, in the UN High Level Dialogue on Energy, it was a proud moment when India was declared as a ‘Global Champion for Energy Transition’. Yet, the heady transition to Net Zero by 2070 will call for greater investments in India. It is imperative for the Ministry of Finance to prepare a strategic roadmap in sync with the ‘Panchamrit’ goals with very clear and stable tax policies to win the hearts and wallets of potential investors in the renewable energy space. What better time than Union Budget 2022–23 to set this in motion? Let’s wait and watch.

The author is managing director, Price Waterhouse & Co LLP and former chairman, CBIC. Views expressed are personal.