Andhra Pradesh High Court Rules Solar Projects Taxable at 5% GST

The Andhra Pradesh High Court recently delivered a significant judgement declaring that the solar power projects fall under the category of ‘composite supply’, and therefore taxable at 5%, under the provisions of the GST Act. This was while it rejected the arguments that the project falls under ‘works contract’, which would have attracted an 18% GST rate.

Key Definitions Under GST Act

Under the GST Act, ‘composite supply’ has been defined as a supply of two or more taxable goods or services naturally bundled and supplied together, where one is the principal supply. On the other hand, a ‘works contract’ has been defined to include activities such as construction, erection, or installation of immovable property with the transfer of property in goods.

The case has its origin with Sterling and Wilson, which is a solar project developer. It was paying GST at 5% on its revenue. It had submitted its claim for input tax credit of Rs. 86.5 million, around $1 million for the first quarter of 2018. In the course of this refund, tax authorities reclassified these transactions as ‘works contracts’ and applied an 18% GST rate to them. This resulted in the tax demand amounting to Rs. 630 million ($7.28 million), along with a similar amount as penalty. Sterling and Wilson appealed the judgment to the Appellate Authority, which agreed to the rate of 18% but partially relaxed the penalty amount. As remedies before that had been exhausted since GST appellate tribunals did not exist then, the company filed a writ petition before the High Court.

Petitioner argued that the activities carried out by them are ‘composite supply’ within the meaning of Section 2(30) of the GST Act, thus qualifying for the reduced rate of 5% GST. It further contended that the Appellate Authority erred in the application of legal provisions and relied upon irrelevant factors in determining the nature of the transactions as ‘works contracts’.

On the other hand, the government representatives argued that the solar projects were installing immovable structures and, therefore, fell within the definition of ‘works contracts’ under Section 2(119) of the GST Act. They also pointed out that solar modules and other components were part of these projects, which were embedded in the earth.

The High Court relied on decisions of different courts to hold that a solar power project would not fall in the category of immovable property. It thus held that the supply of the solar-generating power station will be treated as ‘composite supply’ and not as ‘works contract’. That being so, it holds the projects liable for tax at 5% GST.

Implications for the Renewable Energy Sector

This decision underlines the difficulties faced by the renewable energy sector under India’s GST framework, where the classification of supplies can have significant tax implications. The case underscores the need for clear guidelines to ensure uniformity and predictability in tax treatment for renewable energy projects.

The High Court’s decision to affirm the 5% GST rate for solar projects has brought clarity to developers and set a precedent for similar cases in the future. This decision is expected to reduce tax burdens and support the growth of the renewable energy sector in India.