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VAT exemption on solar panels and invertors in Karnataka

We first began exploring the issue of Value Added Tax (VAT) on Renewable Energy devices and spare parts in early 2013. Since VAT is a state subject, with RE devices and spare parts attracting 5.5% VAT in Karnataka, the state Energy and Finance departments became crucial stakeholders to any effort. It was important to illustrate that this imposition of VAT on one hand and the provision of a Central Government subsidy on solar systems on the other hand are contradictory in effect. The final result is that the benefit for the end user availed from subsidy is greatly reduced and works out to less than 25% of the original intended benefit.

Solar home lighting system in rural India
After engaging persistently with key decision makers on the issue over the last 2 years, the Government of Karnataka announced an exemption of Value Added Tax (VAT) on certain solar Panels and Invertors, in the State Budget for FY 2015-16. The final notification from the Finance Department came on 1st August putting the exemption into effect. This move complements existing programmes such as Surya Raitha scheme, subsidies for Solar water pumps and promotion of Roof top solar that promote alternate, cleaner sources of energy, providing confidence to solar enterprises and companies that the state is serious about this sector.

We do, however, have some distance to go. The Goods and Services Tax (GST) that will likely come into effect from April 2016, will replace VAT and ensuring that a GST exemption is relevant for all Renewable Energy devices and spare parts is critical. The goal continues to be to ensure that end users who are moving to greener, cleaner and more renewable sources of energy are not burdened with the additional cost of VAT/GST on their systems.