The 56th Goods and Services Tax (GST) Council meeting represents a significant milestone in India’s ongoing tax reform efforts. The simplification of the GST structure is a decisive and forward-looking action, demonstrating the government’s commitment to achieving a “Good and Simple Tax” and its confidence in industry’s role as a catalyst for economic expansion. A strategic adjustment in tax policy is evident through the increase in GST rates on coal and certain goods and services related to oil and gas exploration, alongside the rationalization of GST rates on renewable energy devices and key inputs like cement, marble, and wood products. This shift strategically promotes the adoption of renewable energy by making clean energy technologies more cost-effective and appealing to investors. This fiscal measure is directly aligned with the national goal of achieving energy independence by 2047. The strategy involves a large-scale transition to renewables, green hydrogen, nuclear energy, and increased domestic exploration of critical minerals, thereby reducing India’s dependence on imported coal, oil, and gas. In summary, these reforms establish a robust and supportive fiscal framework for the power and energy sector, significantly enhancing its viability and long-term resilience.
Impact on industry
While the increase in GST on coal from 5% to 18% (replacing the previous INR400/ton cess) is not anticipated to materially impact thermal power costs, the reduction in GST on cement from 28% to 18% is expected to favorably affect infrastructure project costs. Crucially, the reduction in GST from 12% to 5% on various renewable energy components will lower project capital costs, thereby improving the financial viability of green energy initiatives. Conversely, the targeted increase in GST on goods and services related to petroleum production and offshore exploration contracts may potentially escalate the costs of oil and gas projects. Overall, by reducing energy costs, which are a primary driver of industrialization, these reforms are expected to stimulate broader industrial development.
Impact on consumers
The GST reforms are designed to deliver significant benefits to consumers and the broader economy, while necessitating key actions from industry players. Consumers will indirectly gain from enhanced energy security and sustainability due to policies that promote a cleaner environment and diversify energy sources. The reduction in renewable energy costs is anticipated to accelerate the expansion of data centers, a critical backbone for India’s digital economy, cloud services, and AI-driven future. Furthermore, improved access to cost-effective energy will fuel urbanization by bolstering infrastructure, industries, and services, and will enable wider adoption of farm machinery, thus enhancing efficiency within the rural economy. Looking forward, businesses must proactively revisit existing contracts and Power Purchase Agreements (PPAs) to factor in the revised tax rates under the ‘tax/change in law’ clauses, ensuring accurate costing and tariff adjustments. It is also crucial to manage inventory and working capital to assess the impact on existing stocks of renewable energy equipment and raw materials. Additionally, industry should review state incentives and engage with state authorities for any necessary revisions, ensure IT readiness to seamlessly implement the updated rates, and assess the financial impact of potentially delayed utilization of accumulated Input Tax Credit (ITC) on CAPEX due to the reduced output tax rate for the manufacturing sector.
Conclusion
The 56th GST Council meeting marks a strategic pivot in India’s fiscal policy, leveraging tax reform to drive the national goal of energy independence by 2047. By significantly rationalizing GST on renewable energy components while concurrently increasing rates on coal and specific oil and gas inputs, the government has established a supportive framework that boosts the financial viability of clean energy, accelerates digital infrastructure growth, and promises long-term energy security and industrial resilience. Industry’s proactive response in revising contracts and managing transitions will be key to fully realizing the economic and environmental benefits of this landmark policy shift.
Expositor(s): Adv. Mahelaka Abrar
