Navigating Regulatory Changes: Customs and Tax Impact on Gujarat’s 120 MW Solar Project

The Gujarat Electricity Regulatory Commission recently considered a petition by a power generation company, a wholly-owned subsidiary of Aditya Birla Renewable Limited, which has set up a 120 MW solar power plant. The petition, filed under relevant sections of the Electricity Act, 2003 and specific articles of the Power Purchase Agreement (PPA) signed on January 30, 2021, seeks imposition of 40% Basic Customs Duty (BCD) on solar modules, with effect from April 1, 2022, and an increase in Goods and Services Tax (GST) from 5% to 12% on various parts and equipment of solar power plants, with effect from October 1, 2021.

During the hearing, the petitioner’s counsel argued that these changes constituted “change in law” events under the PPA. The imposition of BCD and increase in GST were brought about through the Finance Act, 2022 and notifications issued by the Ministry of New and Renewable Energy (MNRE) and the Ministry of Finance, respectively. The petitioner sought a declaration from the Commission that these changes should be considered as “change in law” events, entitling the petitioner to claim additional costs incurred on account of these changes.

The petitioner stressed the significant financial impact of these changes on the project. He argued that the increased costs due to new duties and taxes were unforeseen at the time of signing the PPA and therefore should be treated as “change of law” events. The petitioner also assured the Commission that he was in the process of preparing all the necessary documents and details to substantiate his claims and would submit them as soon as possible.

The respondent, Gujarat Urja Vikas Nigam Limited (GUVNL), replied that the claim for “change in law” should be assessed strictly on the terms of the PPA. They argued that the expression “etc.” and “such as” in the change in law provision of the PPA indicated that the clause was intended to cover a wide range of duties and levies under the law and not just those expressly mentioned. The respondent also observed that the petitioner should have imported the equipment under the Project Import Scheme, which offers concessional rates but is not permitted for solar projects. The respondent further submitted that there is no provision in the PPA which expressly rejects the claims made by the petitioner.

The Commission took into consideration the arguments of both the parties and requested the petitioner to submit invoices and documents which clearly show the payment of BCD and GST, showing a direct correlation between the project, supply of goods/services and the invoices issued. This documentation should be supported by an auditor’s certificate to verify the authenticity of the claims. The petitioner agreed to submit these documents and details at the earliest opportunity.

The petitioner further requested for an extension of time beyond October 14, 2022 due to delays caused by these additional duties and taxes. They emphasized that the solar modules were imported before the scheduled commercial operations date (SCOD) and that the GST also occurred before that date. The petitioner reiterated that there is a clear one-to-one correlation between the invoices and the additional costs incurred due to the change in law related events.

The petition highlights the challenges that power generation companies face due to unexpected changes in tax and customs regulations, which can significantly affect project costs and schedules. The Commission’s decision in this case will set an important precedent for how such “change of law” claims will be handled in the future, balancing the interests of energy developers and regulators. The outcome will also affect the financial planning and risk assessment strategies of companies involved in renewable energy projects.

For more details, please see the document here.

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