Central Electricity Regulatory Commission Declares GST Reduction on Renewable Equipment a Change in Law

Introduction

The Central Electricity Regulatory Commission (CERC) has issued a suo moto order recognising the reduction in the Goods and Services Tax (GST) rate on renewable-energy devices and components from 12% to 5% as a “Change in Law” event under Power-Purchase Agreements (PPAs). The tax change took effect on 22 September 2025 and applies to equipment used in solar, wind, biogas and waste-to-energy projects. This recognition enables tariff adjustments so that the financial impact of the reduced tax flows to procurers and electricity consumers, as required under contractual and regulatory principles.

Explanation

A “Change in Law” event protects parties in long-term contracts from financial shifts caused by statutory amendments after their bid submission. When GST was raised from 5% to 12% in 2021, CERC classified that increase as a Change in Law. Developers were allowed tariff relief to balance the increased tax burden. With the return to the 5% rate, CERC has followed the same legal approach, but in favour of procurers.

The order applies to projects where the bid date is earlier than 22 September 2025. As per the directive, the relevant trigger is the date of invoicing or tax payment. If either situation occurs on or after the effective date of the reduced GST rate, then this benefit shall be evaluated under the framework of Change in Law. This assures that benefits are tied to transactions, and not simply to contractual implications.

Developers must provide supporting documentation that establishes the GST reduction has decreased the capital cost for a specific project. CERC will require an audit-certified assertion that links every invoice to the project’s assets. This prevents inflated claims and contributes to a simple verification process in the tariff calculation. The Commission has also requested that the impact of tax benefit be reconciled periodically to mitigate disputes and delay in the benefit’s transfer.

The Commission has also indicated that developers may not retain the benefit of tax savings. As stated in the PPA and under GST law, the benefit is a financial gain to be passed on to distribution licensees (DISCOMs), who then have the responsibility of passing the benefit to the end-use consumer. This approach ensures the focus remains on consumer-level tariff outcomes and not on revenue retention by market participants.

This method supports commercial certainty in the power sector. Renewable-energy contracts run for long durations, and their cost structure depends on tax treatment at the time the tariff is quoted. Any change in statutory levies affects project returns, power-procurement budgeting and financing terms. By providing direct guidance on tariff revision, CERC reduces uncertainty for ongoing and planned projects.

The economic effect of the GST reduction is straightforward: lower taxes reduce capital costs. In renewable-energy projects, major expenditure is on hardware such as solar modules, inverters, towers and electrical accessories. These items were subject to the earlier 12% GST. Lower taxation brings down the project cost base and supports price discipline in competitive bidding.

However, the exact scale of savings may differ. Under the lower 5% GST bracket, input-tax credit availability may fall for developers depending on procurement structure. Some developers may benefit from lower tax outflows, while others may find that reduced credit offsets part of the benefit. CERC’s reliance on invoice-linked claims ensures that any financial relief reflects actual figures.

The order reflects CERC’s role in the timely implementation of fiscal changes. Tax policy may evolve independently of electricity regulation, creating potential gaps between statutory law and contractual frameworks. CERC has intervened to prevent contractual imbalance and avoid arbitrary outcomes that could arise from one-sided cost advantages.

The approach is consistent with past regulatory treatment. If tax increases warrant tariff compensation, tax reductions must also trigger tariff reductions. This symmetry is central to regulatory oversight in competitive power procurement. It assures procurers that they will not pay more than necessary due to external legal changes, while assuring developers that they will not absorb unplanned cost escalations.

This clarity also influences future procurement. Investors can assess long-term risk more accurately when contractual responses to statutory changes are predictable. Stakeholders can plan supply chains, financing structures and commissioning timelines with fewer contingencies. By applying the same standard to both upward and downward cost impacts, CERC promotes discipline and contractual certainty across the renewable-energy sector.

Conclusion

By categorising the GST reduction as a Change in Law event, CERC establishes a clear process and timeline for tariff adjustment. The order ensures that financial benefits are passed through to DISCOMs and ultimately to consumers, while requiring developers to substantiate claims through verified data. This reinforces regulatory consistency, consumer protection, and financial transparency in India’s renewable-energy market.