Tax increase puts ‘final nail in the coffin’ for renewable energy industry

• 14% concessional tax on industry removed; to be taxed at 30%
• But sector works on fixed tariff for 15-20 years; unable to pass cost of tax increase to CEB

The Federation of Renewable Energy Developers (FRED) yesterday highlighted their plight with the government withdrawing the 14 percent concessionary tax on renewable energy sector and slapping it with a 30 percent corporate tax. FRED pointed out that unlike other industries the renewable energy sector’s sole buyer is the government and the tariffs charged by renewable energy developers is fixed for a period of 15 to 20 years.

“The renewable energy sector should be considered as an infrastructure development sector and not as a normal trading sector,” the industry association said in a statement. 
“The increase in the corporate tax rate has taken the renewable energy sector by surprise specially when the Interim Budget 2022 proposal announced in August 2022 increased the rate from 14 percent to 15 percent,” it added. 

Renewable energy sector tariffs are fixed for the period of the power purchase agreement (PPA), which is for a 15-to-20-year period and the feed-in-tariffs (FIT) are determined by a tariff committee consisting of several government representatives.  FRED pointed out that FIT does not consider the corporate taxation, hence the developers are not able to pass on the increase in corporate tax rates to the Ceylon Electricity Board (CED) due to its long-term agreements.

“The developers when evaluating the investment in renewable energy projects based their evaluation on the taxation policy prevailing at the time of the investment and signed long-term PPA on that basis. Hence, it is imperative to maintain the concessionary taxation rate for infrastructure projects like for renewable energy projects,” the statement noted. 

Sri Lanka’s renewable energy sector is currently encountering numerous issues due to the increase in cost due to the rupee depreciation, increase in interest cost and the increase in supplies cost owing to the increase in VAT and Social Service Levy.  This is in addition to the inability/delay of importing the required spares due to the shortage of foreign exchange.

Meanwhile, the CEB has delayed payments to the renewable energy sector and currently CEB is paying the October 2021 invoices while they are bound to settle the invoices within 30 days. As a result, the renewable energy sector is owed about Rs.40 billion as of date.

“The policy of the government is to encourage the development of the renewable energy sector and the target is to achieve 70 percent electricity from the renewable energy sector by 2030. The removal of the concessionary rate puts the final nail in the coffin for the renewable energy industry and defeats the very objective of the government,” the FRED statement said.

 
“This would mean additional requirements for the import of oil and / or longer power cuts which would aggravate the foreign exchange issue. Further, the FRED strongly opposes this draconian provision which is against our country’s future national security (energy security) and requests to at least retain the concessionary tax rate or enact the provisions to adjust the tariffs at which electricity is sold under the power purchase agreements to the CEB for renewable energy projects,” it added.