GST notification on solar projects adds to ambiguities

By Sudipta Bhattacharjee, Advaita Legal

Solar power projects in India have suffered from ambiguity regarding applicability of the goods and service tax (GST) on input. This is a critical issue since power projects have no output GST and thus their entire input GST becomes a cost for the project leading to higher tariff.

A concessionary rate of 5% GST has been provided for solar power generating systems, solar PV modules and parts for manufacture of products under entry 234, notification no.1/2017-Central Tax (rate).

Sudipta Bhattacharjee   Advaita Legal
Sudipta Bhattacharjee
Advaita Legal

However, with no clarity as to what constitutes a solar power generating system, coupled with the fact that turnkey EPC (engineering, procurement and construction) contracts for supply of solar power generating system were being consistently held to be works contracts and thus liable to 18% GST led to myriad representations seeking clarity from the government as well as several creative contracting structures (based on varying interpretations of entry 234) and even indemnity negotiations.

In fact, owing to such ambiguities, while introduction of GST has clearly been held to be a change in law under power purchase agreements, calculation of tariff increments to be awarded to solar power developers on that account has been a contentious issue since the exact increment post-GST in tax cost is difficult to determine.

In a GST council meeting held on 22 December, a much-awaited clarification was recommended in relation to the GST applicable on solar power generating systems and other renewable energy devices. This was implemented by notification no.24/2018-Central Tax (Rate), which came into force on 31 December 2018, and it added an explanation to entry 234: “If the goods specified in this entry are supplied, by a supplier, along with supplies of other goods and services, one of which being a taxable service specified in the entry at S. No. 38 of the table mentioned in the notification No. 11/2017-Central Tax (Rate), dated 28 June 2017, the value of supply of goods for the purposes of this entry shall be deemed as 70% of the gross consideration charged for all such supplies, and the remaining 30% of the gross consideration charged shall be deemed as value of the said taxable service.”

Further, a new entry 38 has been added in the notification no. 11/2017-Central Tax (Rate) pertaining to rate of services – this prescribes an 18% GST rate for services under chapter 9954, which pertains to construction services, or 9983, which pertains to other professional, technical and business services (except research, development, legal and accounting services), or 9987, which pertains to “maintenance, repair and installation (except construction) services”, “by way of construction or engineering or installation or other technical services, provided in relation of setting up of” bio-gas plant, solar power generating system, waste-to-energy plants/devices.

However, it has not been explained whether this notification would be treated as a clarification and therefore would have a retrospective effect, or whether it would only apply prospectively for all future supplies/contracts. It is possible to take a view, given that a new and specific section is being introduced by this explanation, that it will only apply prospectively.

Whether in a single EPC contract scenario, can a supplier bill separately, by treating 30% as supply of services and 70% as supply of goods, is debatable as single EPC contracts have been repeatedly held by various advanced ruling authorities to be a composite supply of works contract liable to be taxed at 18% GST. The definitions of works contract as well as composite supply remain unchanged under GST and the newly added explanation does not begin with any non obstante clause.

Last but not the least, practical challenges may arise at the time of invoicing and payment of taxes (in scenarios where this explanation will apply), as the actual supply proportion between goods and services under a single EPC contract may not necessarily be equivalent to 70:30 and may end up being 80:20 or 90:10. This may result in a situation of artificial valuation or a scenario where an invoice is actually raised for supply of goods; however since the 70% cap is exceeded, the GST applicable on such supply may be at 18% by deeming the same as supply of services.

To sum up, the explanation to entry 234 appears to have created some new ambiguities. It will be advisable for solar power players to seek additional clarifications to mitigate future litigation exposure.

Sudipta Bhattacharjee is a partner in the tax controversy management and contract documentation practice of Advaita Legal.

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