MARCH 20, 2018

By Satish Gandla

ON account of growing needs for generation of renewable energy and keeping in mind the tremendous increase in waste generation, emission of greenhouse gases etc on account of using inputs such as coal, oil, gas etc (viz., non-renewable energy), Government of India and Ministry of New and Renewable Energy (hereinafter referred to as 'MNRE') has opined the need for generation of power using non-conventional materials such as municipal and urban waste etc.

For achieving the said objective, Government has made urban local bodies responsible for supply of waste to companies establishing and operating Waste to Energy (WTE) power plants. Further, it has been giving the benefits such as providing additional financial grants and tax exemptions/rebates for equipment and machinery used for setting up and running the power plant etc.

Notification No. 2/2017-Central Tax (Rate) dated 28.06.2017 provides exemption for Intra-state supply of goods. Serial number 104 of the said notification provides that Electrical energy is goods classifiable under HSN 2716 and supply of electrical energy is exempted under GST. Therefore, the GST paid on procurement of various capital goods, inputs and input services (both forming part of capital cost as well as operation & maintenance costs) used for generation of electricity would continue to be non-creditable for the energy sector and hence, taxes incurred would have a direct impact on cost of electricity.

Serial No. 234 of Schedule I of the Notification No. 1/2017-Integrated Tax (Rate) dated 28.06.2017 prescribes rate of tax (GST at the rate of 5%) for the following renewable energy devices & parts for their manufacture which are covered by HSN 84 or 85 :

a. Bio-gas plant

b. Solar power-based devices

c. Solar power generating system

d. Wind mills, Wind Operated Electricity Generator (WOEG)

e. Waste to energy plants / devices

f. Solar lantern / solar lamp

g. Ocean waves/tidal waves energy devices/plants

h. Photo voltaic cells, whether or not assembled in modules or made up into panels

The relevant entry to be analysed here is 'renewable energy devices & parts for their manufacture – Waste to energy plants/devices'. Unlike other entries such as entry (b) and (c) where power -based devices/systems are mentioned, the entry in this case is mentioned as Waste to Energy . It can be perceived that the preceding entries cover all devices which are used to generate power whereas the latter entry covers only the devices which produces energy. There is an ambiguity in the scope of entry, thus, arising the need to evaluate the difference between energy and power.

The words 'Energy' and 'Power' are not explicitly defined under GST Law. In general understanding, Energy is the capacity to do work whereas Power is the rate at which work is done, or energy is transmitted. Energy is power integrated over time. The different forms of energy include heat, kinetic, potential, thermal, gravitational, electromagnetic, sound, light and elastic whereas the different forms of power could be electric power which is the rate at which energy is transferred. Thus, it appears that energy and power are not synonymous.

Renewable energy is energy that is collected from renewable resources, which are naturally replenished on a human timescale, such as sunlight, wind, tides, waves and geothermal heat. Though, what is a renewable energy device is not defined explicitly in the GST Law, it is understood as a device which can convert the renewable resources such as sunlight, waste etc., into energy.

In this connection, we shall take note of the relevant notifications under the erstwhile regime. Serial no. 332 of Notification No. 12/2012-C.E., dated 17.03.2012 provided exemption from central excise duty for Non-conventional energy devices/systems (falling under any chapter) specified in List 8. Item (16) of List 8 to the notification prescribed agricultural, forestry, agro-industrial, industrial, municipal and urban waste conversion devices producing energy as non-conventional energy devices.

Notification no. 33/2005 - Central Excise, dated 08.09.2005 provided central excise duty exemption for all equipment used for initial setting up of a WTE (waste-to-energy) plant. This notification provided full central excise duty exemption in respect of all items of machinery required for initial setting up of a project for generation of power using non-conventional materials, namely, agricultural, forestry, industrial, municipal and urban waste etc.

From reading of the above notifications, there is a clear distinction in the exemptions granted i.e., the first notification provided exemption to equipment which could produce energy whereas the latter notification provided exemption to equipment for initial setting up of powerplant which generated power/electricity using waste. Thus, first notification restricted exemption to energy producing devices as against power producing equipment.

In this connection, it is pertinent to note that in the case of Triveni Engineering & Industries Ltd V. Comm. of C. Ex., Bangalore - 2004-TIOL-638-CESTAT-BANG (maintained by Supreme Court) , the Hon'ble Tribunal held that a boiler is used to generate steam out of waste viz., for conversion of waste into energy, whereas turbine is used to convert steam in to power viz., for converting one form of energy into other form of energy.

Further, in the case of Boiler Tech Engineers v. Commissioner of C. Ex., Ahmedabad [Order No.- 857-859/99-WZB/C-II dated 13 April 1999] , the Hon'ble Mumbai tribunal held that the boiler made exclusively for converting a waste into energy shall be treated as the 'waste conversion device' and eligible for the excise duty exemption.

Therefore, it appears from the above that the equipment that are covered under 5% GST rate are only devices which convert waste into energy such as boiler. Other equipment such as turbine, condenser, etc.might not fall within the 5% bracket as they do not convert waste to energy. The entry also covers any parts used for the manufacture of the WTE devices specified under the entry. Therefore, it appears that parts used for manufacture of boiler alone would be covered within the scope of GST rate of 5%.

Plain reading of the entry treats a WTE plant as a renewable energy device. The entry covers parts used for the manufacture of WTE Plant. Normally, Companies procure various equipment and install and assemble such equipment for setting up of WTE plant. The word manufacture has been defined under GST as processing of raw material or inputs which results in emergence of a new product having a distinct name, character and use. Whether mere installing &assembling amounts to processing or not and can the same be said as manufacture of WTE plant is a question requiring interpretation.The understanding laid down under the erstwhile central excise regime is based on the concept of manufacture and removal, which is different from GST. Nonetheless, based on the understanding laid down and definition given under GST, it can be said easily that mere installing &assembling is not manufacture as there is no processing of raw material or inputs is done in the given case.The entry covers parts used for manufacture of WTE plant whereas the manufacture requires use of raw material/input. Prima facie, whether equipment procured for setting up of WTE plant can be said as parts and will the same amount to raw materials/inputs is again subject to interpretation. Hence, the language in the entry as regards parts used for manufacture of a WTE plant is ambiguous and capable of multiple interpretations.

Albeit the above observations, plain reading of the entry suggests that it is applicable only for renewable energy devices. The heading of the entry though says renewable energy devices, it also covers devices which produce power/electricity apart from devices which generates energy. In addition, Notification No. 2/2017-CT(R) prescribes electricity (viz., power) as electrical energy viz., treats electricity as a form of energy. Thus, the energy producing devices can also include electricity producing equipment. If the entry is to be analyzed basis these arguments, then entire equipment used to generate electrical energy (viz., entire WTE plant) would qualify as energy producing devices from renewable sources and hence,would get covered under the entry and suffer GST at the rate of 5%. Therefore, there is an inbuilt ambiguity in understanding and interpretation of the scope of the entry.

In the erstwhile regime, companies used to claim central excise duty exemption under the notification no. 33/2005 - Central Excise, dated 08.09.2005, for all the equipment used for initial setting up of the WTE plant. Further, they used to claim partial customs duty benefit and full CVD benefit under the notification no. 81/2005 - Customs , dated 08.09.2005, which provides exemption in respect of all the equipment used for setting up WTE plant.For availing the above exemptions, companies were obligated to obtain a certificate from MNRE specifying that the imported/indigenous equipment are for use in setting up of a project for generation of power using waste.

No such exemption or benefit has been carried forward under GST for setting up of WTE plant. However, Sl. No. 234 of Notification has been issued which is ambiguous on the scope of applicability of concessional rate of 5%.Thus, with the advent of GST which is based on the foundation of credit fungibility and reduction of conditional exemptions, the companies setting up and operating power plants based on waste, should not be made to pay higher taxes which increases the cost of generating per unit of electricity, which in turn is a burden kept on the consumers of electricity. Further, though the intention of GST is not to provide end use-based exemption, it is not the motive of the Government to increase the tax impact under GST regime on power generating companies. Therefore, the Government is expected to provide a clarification on the scope of Sl. No. 234 of Schedule I of the Notification No.1/2017-Integrated Tax (Rate), in order to avoid multiple interpretations leading to litigation.

To sum up, based on the settled law and literal interpretation of the entry, one may say that lower GST rate is restricted only for Boilers and parts used for manufacture of Boilers. Nonetheless, considering the Government's intention to support renewable energy sector and the exemptions provided in the erstwhile tax regime, the tax payers may argue that the intention is always to cover the equipment used for generation of electricity (viz., power) and hence, 5% GST rate is applicable for equipment used in setting up of WTE plant.The confusion arising out of such interpretations could lead to litigation between the taxpayers and tax department and wouldbe required to be decided by the Courts.

(The author is Associate, Lakshmikumaran & Sridharan, Hyderabad and the views expressed are strictly personal.)