Ranjeet Mahtani, Partner, and Nischal Agarwal, Senior Associate, Dhruva Advisors LLP
The renewable energy sector has been growing healthily across the globe, offering the earth’s citizens a greener and cleaner means of energy. According to a report by the India Brand Equity Foundation, solar energy capacity in India increased eight times between 2014 and 2018 (26 GW in 2018), and the solar energy sector received investments of over $10 billion in 2017.
It must be understood that the way energy is produced, distributed and used causes environmental damage (including climate change); therefore, our future depends on our ability to decarbonise quickly. Recently, the Centre for Science and Environment warned that India will not be able to meet its Paris Agreement commitment (generating 175 GW of renewable energy by 2022), if the sector continues to be plagued by policy inconsistency.
Recognising the gravity of the situation, the Indian government has sought to levy the goods and services tax (GST) on solar power projects at a benevolent rate. Yet, the GST advance rulings across the country have mandated that the setting up of solar power projects constitutes a “works contract” under the GST law and is taxable at 18 per cent. Since the solar industry operates on slender margins and its customers are generally not entitled to input tax credit, the high tax position hinders the growth of the solar sector.
To reduce the adverse impact of the high tax on solar power generation systems (SPGSs), the GST Council, in its 31st meeting on December 22, 2018, recommended that GST be paid at 5 per cent on 70 per cent of the gross value of the contract and at 18 per cent on the balance value (that is, 30 per cent of the gross value of the contract). To effectuate the recommendations, vide Notification No. 24-CT(R) dated December 31, 2018, an explanation was inserted in Sr. No. 234 of Schedule I of Notification No. 1/2017-CT(R) dated June 28, 2017 in line with the recommendation. Hence, the effective GST rate for setting up an SPGS is 8.9 per cent, when there is comprehensive supply, including modules and other equipment, installation and commissioning, and civil works as part of the contract. It is another matter and open to challenge as to which statutory provision empowers the government to prescribe and artificially split the value of a supply (under a given contract), part of which is deemed to be the goods portion and the remainder as “services” for the purpose of levy of GST.
The intentions, while well meaning, appear to have resulted in a solution without contemplating certain issues that the industry could face after the amendment. Some of these grey areas are discussed here…
The Authorities for Advance Ruling (AARs) and Authorities for Advance Ruling of various states have held that such a comprehensive supply results in an immovable property, and is hence classifiable under the “works contract” and taxable at 18 per cent.
The question whether an SPGS contract will be classified as supply of “works contract” service, in line with the advance rulings, or under the amended entry at Sr. No. 234 above as SPGS, remains unaddressed. The bone of contention is whether SPGS qualifies as immovable property, as ruled by the AARs and AAARs, and continues to be classified as “works contract,” or, disregarding this general entry, the SPGS should be taxed at 5 per cent/18 per cent on the entire contract. Sr. No. 234 is a more specific entry, and it is trite law that the specific entry will prevail over the general entry; consequently, the test of immovability becomes irrelevant.
Said differently, where the contractor makes a comprehensive supply to the customer (turnkey contract), whether the contractor has to necessarily discharge tax liability under the explanation. Whether the revenue authorities can adopt a different and higher valuation and tax rate, especially on the basis of SPGS being immovable in nature (wherever factually relevant), as was held in the advance rulings remains open to guesses.
This issue will have a bearing on the rate as also on other touchpoints including invoicing, return filing, etc.
Amendment – Retrospective or prospective?
A strict reading of the notification reveals that it should have a prospective effect. This raises issues as to whether the amendment is applicable to agreements entered into after the amendment or will it cover all invoices raised after the amendment.
In the case of an ongoing contract, where invoices have been raised at multiple rates, whether it is required to be aligned with the valuation mechanism prescribed by the amendment and adjust the previous or future invoices is not addressed.
In all situations, invoicing may be a task since the value in contracts is not typically bifurcated, resulting in inadequate clarity as to whether the invoice should depict 70 per cent of the value as goods and the balance as services, despite the fact that the actual supply at that point in time may be only for goods or services. A collateral issue is to have the e-waybill reconcile with the invoice when, for tax purposes, the supply values are (owing to legal fiction) bifurcated into goods and services.
It is trite law that a proviso that is inserted to remedy unintended consequences could be read as retrospective in operation. The amendment seeks to remedy the unintended tax structure and intends to bring down the tax cost of solar projects. It thus becomes plausible (although unlikely to succeed) to contend that the amendment operates retroactively, and so refund becomes due to suppliers who have paid tax at a higher rate. Similarly, for suppliers who had discharged their GST liability at a lower rate (lower than 8.9 per cent), whether the supplier will have to pay the differential tax with interest remains unanswered.
GST rate on supply of other equipment
In cases where the contract provides for the supply of modules along with other items (such as inverters and structures), the applicable GST rate on such ancillary items may become a sticky point. Para 11.2 of Circular No. 80/54/2018-GST dated December 31, 2018 clarifies that the notification will apply only to goods falling under chapters 84, 85 and 94 and will not be applicable to products classified under other chapters. Hence, the GST authorities may tax items falling under chapter 73 or 74 (structures, items, etc.) at 18 per cent and not 5 per cent, as prescribed in the explanation. This will be in addition to 30 per cent of the gross contract value that is taxable at 18 per cent. In other words, can there be a case of value shifting to garner higher taxes?
The language of Notification No. 24/2018 includes “parts for their manufacture” without any restriction on the nature and the classification of such parts. Hence, all parts for the manufacture of SPGSs should be eligible for 5 per cent GST and the restriction in the circular is contrary to the language of the notification. The advance ruling in Eapro Global (2018  TMI 1526 [AAR Uttarakhand]) also supports this position. In conclusion, even the supply of ancillary items falling under CTH 73/74 is part of a composite supply, where SPGS is the principal supply, taxable at 5 per cent.
Taxability of contracts where modules are supplied by the contractor free of cost
Customers could buy photovoltaic modules and other equipment and provide these to the contractor, free of cost (FOC). In such situations, is the supply of the remaining equipment and services, the supply of SPGS or parts thereof are thus taxable at 5 per cent/18 per cent, or is it a composite supply to be taxed at the rate of the dominant/principal supply?
First, the primary issue is what will be the tax implication for the remainder of the contract (that is, supplies excluding FOC supplies). The AAAR Karnataka in the Giriraj Renewables (2018  GSTL 156) ruled that the supply of the remainder equipment and the supply of services are “composite supply” and taxable at the rate of principal supply. From a study of the contractual terms of each case, it needs to be ascertained whether the remainder of the supply is a “composite supply” of SPGS and can fall within the scope of Entry Sr. No. 234 or otherwise.
Second, Section 15(2)(b) of the CGST Act may become applicable, which provides that the value for discharging GST will include the amount that the supplier is liable to pay but which has been incurred by the recipient and not included in the price paid or payable for such supply. The agreement between the parties should be examined to determine what has been explicitly or implicitly specified as the obligation of the supplier and that of the recipient.
Given the varied emergent issues, which also potentially raise tax costs for businesses (in almost all such projects, GST is not creditable, and is therefore a sticking cost in the supply chain), the GST Council should align with objectives for this sector and re-examine the various facets affecting this sector, some of which are described above, to provide suitable clarifications.