GST Rate 5% or 18%? Solar Sector Continues to Live with Uncertainty

A year on, stakeholders are still in the dark about how the rate applies, while conflicting state commission rulings on the rate have only added to the confusion


Passed on 1st July 2017, India’s Goods and Services Tax (GST) is an indirect tax imposed on goods and services, and replaces existing state and central taxes of a similar nature. The goal of the GST is to simplify the indirect tax for the country as a whole.

 “It has now been well over a year since the GST came into effect and there is still no clarity which has been a drag on solar installations in the country.  States are also issuing their own interpretations, adding to the confusion. Solar companies are still struggling to figure out the GST rates applicable on various goods and services that go into the development of a solar project,” said Raj Prabhu, CEO of Mercom Capital Group.

A few months ago, Mercom had reported about how the ongoing delays in GST reimbursement and lack of clarity are affecting solar project developers in India. Today, the situation remains the same.

An official at Rays Infra, an EPC services company told Mercom, “If we sell the complete solution, then it has a GST rate of 5 percent. But in case we unbundle it and provide to the customer separately,  then the components will have 18 percent GST rate.”

Highlighting the issues faced by developers, he added, “What we expect is that the GST rate of 5 percent should be applicable to the entire range of products and services in the renewables industry. At times, it is difficult to include every product and make it an integrated solution as you don’t know if you are going to sell it as a total solution or a separate product.”

A project developer shed some more light on the issue, “As far as GST is concerned, the issues we had have been mostly cleared by the CERC. But the key issue is that there are advanced rulings which talk about 5 percent as well as 18 percent GST. We have claimed only 5 percent for power generating systems but if there is a change again from 5 percent to 18 percent, as some of the advanced rulings have come, this issue will again come up. This is where we are stuck. The Ministry of Finance is yet to confirm which contract would come under 5 percent and which under 18 percent. This is not clear in the law and that’s why it has to be clarified by the Ministry of Finance. Unless they declare it, the courts and commissions will take decisions on their own reading and understanding of the law. These rulings are creating a lot of confusion”.

The ongoing confusion and uncertainty has been compounded due to the varied state commission rulings on the matter.

Recently the Authority of Advance Ruling (AAR) for the state of Uttarakhand ruled that ‘composite supply’ will be taxed at five percent. However, the Maharashtra State Authority of Advanced Ruling (MSAAR) in a parallel order  said that if an agreement for the ‘supply of goods’ extends to other aspects of a solar power project, such as design and operations, then the rate of tax would be 18 percent under the IGST Act.

Meanwhile, Karnataka concluded that a turnkey engineering, procurement & construction (EPC) contract for the construction of solar power project in which both goods and services are supplied cannot be interpreted as a composite (a mix of components which make up a solar project) supply contract. Therefore, the state said, in this case, the supply of each component in the contract cannot have a flat tax rate of 5 percent GST, but instead must be 18%.

A project developer informed Mercom that a representation on the issue has been forwarded to the government from the Solar Projects Developers Association (SPDA).

An SPDA spokesperson said, “We have made a representation on behalf of developers to the Ministry of Finance (MoF) for clarifying the rates of GST applicable for solar power generating systems. The rate in the law states that it is 5 percent. But the solar power generating systems are procured in various segments, including ground mounted, rooftop, floating, micro-grid etc. So, we want the MoF to clarify what rates will be applicable for these segments.”

He added “Solar power generating systems are also procured in various contracting structures. For example, composite turn-key supply or segregated supply and services. Only the supply part has 5 percent GST, so we are seeking clarification from the MoF about which contracting structure will attract a particular rate.”

Currently, the ministry is reviewing the documents submitted by SPDA and is expected to take this matter with the GST Council, according to the representative.

Recently, the CERC issued an order to compensate solar power developers through a one-time payment, which they would have incurred as an additional capital expenditure after the introduction of GST Law. It asked the government agencies to make adjustments in the quoted tariff because of the additional operating and recurring expenditure that will incur for the entire term of the project.

Similarly, CERC issued an order stating that laws related to GST are covered as Change in Law under Article 12 of the power purchase agreements (PPAs).

Recently, the MNRE issued an order extending the commissioning date of solar PV projects that were affected after the imposition of GST and other related issues.

It is unclear why it has taken over a year for the Ministry of Finance to issue a clarification on the GST rate discrepancy and put the matter to rest for the solar sector – once and for all.

Nitin is a staff reporter at and writes on renewable energy and related sectors. Prior to Mercom, Nitin has worked for CNN IBN, India News, Agricultural Spectrum and Bureaucracy Today. He received his bachelor’s degree in Journalism & Communication from Manipal Institute of Communication at Manipal University and Master’s degree in International Relations from Jindal School of International Affairs. More articles from Nitin Kabeer