Indian Tax Solution

Solar plants await clarity on GST rate

There is still no clarity on the rate of goods and services tax (GST) that's applicable on solar plants, with the industry divided on the matter and two state appellate authorities for advance rulings issuing divergent orders.

The rulings of the appellate authorities came on appeals against the decisions of the Karnataka and Maharashtra advance ruling authorities, which had pegged the GST rate at 5% and 18%, respectively.

The Karnataka Appellate Authority for Advance Rulings (AAAR) backed the findings of the state AAAR that supply of photovoltaic modules is a distinct transaction and cannot be said to be naturally bundled with the supply of other components and parts of a solar power plant.

It observed that the supply of other components and parts and the supply of services of erection, installation and commissioning of the solar power plant are 'composite' as they are naturally bundled and accordingly, the tax rate applicable to the dominant nature of supply shall prevail.

Taking a divergent stand from the Karnataka AAAR ruling, the Maharashtra AAAR, in the case of Fermi Solar Farms and Giriraj Renewables, held that the supply of solar power generating system constitutes a composite works contract that's liable to taxed at 18%.

Even the solar power industry remains divided on the issue, with players taking varying positions.

Some have taken a conservative view that the entire project should be treated as a works contract with a levy of 18%, while others have adopted the position that projects are under "renewable energy devices & parts for their manufacture like solar power generating system" with a levy of 5%.

Some are levying a 5% tax on each component and 18% on services. Other companies that aggressively advocated a levy of 5% have got notices from tax authorities.

The Solar Power Developers Association, which has approached the government to provide clarity, has also pitched for a rate of 5%.

"The industry was already perplexed on account of divergent advance rulings. To add to their bewilderment, even Appellate Authorities for Advance Rulings have given diametrically opposite rulings. While one AAAR has held supply under solar power project as not composite, the other has observed that even where there are two separate contracts for supply and services, holistically, it is one indivisible contract for setting up of solar power generating plant," said Harpreet Singh, a partner at KPMG.

An appropriate clarification by the government to clear the myriad interpretations on the taxability of solar power projects is the need of the hour, Singh added.

 

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