Monday, February 26, 2024

Solar For You: Is it investment Ready?

This story has been co-authored by Nidhi Arora and Sanjay Banerjee, technology enthusiasts at EFY Group.

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Haryana, Rajasthan and Maharashtra have already started reaping the benefits of solar power, while Delhi and Punjab are promoting them in a big way for faster adoption by the masses.

For clarity of the thoughts exchanged here, we discuss below a project with total generation capacity of 1MW per day. Section 32 of Income Tax Act provides for accelerated depreciation of 80 per cent invested capital into solar PV projects to professional companies with tax liabilities. Investors can set off tax liability on their taxable income to the tune of 80 per cent in the first year, and subsequently 20 per cent from second year onwards.

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Example: If your company paid Rs 33 as tax on a profit of Rs 100 earlier, by installing a solar plant at a cost of Rs 100, you can simply claim a deprecated expense of Rs 80 (80 per cent) in the first year, thus reducing your profit for tax purposes to Rs 20. Now, you need to pay just Rs 6.6 as tax. In other words, you end up saving Rs 26 on your investment of Rs 100 in the solar plant. The inherent impacts of these tax provisions are cost saving on infrastructural development to the tune of 20 per cent and reduced electricity payout load of Rs 2 per unit.

For reference and understanding, let’s consider:

1. Project cost (capital cost) Rs 80 million
2. Depreciation amount 90 per cent (assuming 10 per cent scrap value)
3. Book depreciation (on fixed assets) 5.28 per cent (dep. as per Companies Act)
4. Tax depreciation rate 80 per cent (under accelerated depreciation benefit)
5. Effective tax rate (as per government) 33.99 per cent

The discussion above shows that the market for solar businesses is ripe, but some hiccups remain in the form of anti-dumping duty, which is adding to its volatility. As the solar business is currently import-dependent, government regulations could lead to cuts in profit. So the question is: Is this the right time to invest in this business? Or what should be done to make the solar business more viable?

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