Whether ITC on Solar Power Generating Plant is available under GST – Comprehensive Analysis

Whether ITC on Solar Power Generating Plant is available under GST – Comprehensive Analysis

1. Background

India is witnessing rapid growth in renewable energy, particularly in the solar power sector. Manufacturing industries, commercial establishments, and even households are increasingly installing solar power generating systems to reduce electricity costs and achieve energy sustainability. For manufacturing industries, electricity is a significant component of production cost, and captive solar generation substantially improves operational competitiveness.

Under the GST regime, while the Government has encouraged renewable energy through concessional tax rates on solar equipment, disputes have emerged regarding the eligibility of Input Tax Credit (“ITC”) on installation, operation, and maintenance of solar power plants and windmills.

The principal controversy revolves around whether:

• Solar power plants constitute “plant and machinery”;
• Electricity generated through such plants amounts to exempt supply;
• ITC is restricted under Section 17(2) or blocked under Section 17(5)(d) of the CGST Act;
• ITC is available where electricity is captively consumed in manufacturing taxable goods.

Recently, departmental proceedings have been initiated in several cases alleging wrongful availment of ITC on solar and wind power installations.

This article analyses the legal framework, judicial precedents, departmental stand, and practical way forward.

2. What is a Solar Power Generating Plant?

A Solar Power Generating Plant is an integrated system consisting of:

• Solar photovoltaic (PV) modules/panels;
• Inverters;
• Transformers;
• Mounting structures;
• Cables and connectors;
• Control panels;
• Monitoring systems;
• Civil foundation and structural supports.

The plant converts solar radiation into electricity through photovoltaic technology.

Broadly, solar power systems may be:

(A) Rooftop Solar Plant

Installed on factory/commercial building rooftops for captive consumption.

(B) Ground Mounted Solar Plant

Installed on land with dedicated infrastructure.

(C) Hybrid Systems

Integrated with windmills or battery storage systems. The electricity generated is generally:

• consumed captively in manufacturing;
• wheeled through the grid;
• adjusted through net metering; or
• partly sold to DISCOMs.

3. Allegation of Department for Denial of ITC

The department is disputing the admissibility of ITC on solar power plants and windmills on the following grounds:

• Electricity generated from solar plants and windmills is exempted vide Entry No. 104 of Notification No. 2/2017-CT (Rate), and therefore goods and services used for generation of such electricity, including solar panels, windmills, and maintenance services, are considered as being used for exempt supplies, attracting reversal of ITC under Section 17(2) read with Rules 42 and 43 of the CGST Rules.
• The department further alleges that solar plants and windmills become immovable property upon installation as they are permanently attached to earth, and accordingly ITC is blocked under Section 17(5)(c) and Section 17(5)(d) relating to construction of immovable property.
• The Department has also contended that electricity generated for captive consumption does not qualify as self-consumption on account of the netting-off mechanism of units. Accordingly, it is alleged that such generation retains the character of an exempt supply, thereby attracting denial or reversal of Input Tax Credit (ITC).

4. Legal Position and Judicial Precedents

The issue requires examination from multiple legal perspectives in light of the contentions raised by the Department. Accordingly, this article seeks to analyse the eligibility of Input Tax Credit (ITC) on various counts, including the nature of captive consumption, treatment of electricity under GST, applicability of exempt supply provisions, and the impact of the netting-off mechanism, with reference to the prevailing legal position and relevant judicial precedents.

A. Whether Solar Power Plant is “Plant and Machinery”?

The answer should clearly be YES.

The Explanation to Section 17 defines “plant and machinery” as:

“apparatus, equipment and machinery fixed to earth by foundation or structural support used for making outward supply. A solar power plant directly contributes to manufacturing operations by supplying electricity indispensable for production”.

The expression specifically includes:

• foundation;
• structural supports.

Therefore, mounting structures and installation infrastructure should also qualify.

Important Judicial Principles

(i) Solid & Correct Engineering Works v. CCE

The Supreme Court held that machinery capable of dismantling and re-erection without substantial damage does not become immovable property merely because it is attached to earth.

(ii) Commissioner v. Rajasthan Spinning & Weaving Mills

The Supreme Court held that credit is admissible on goods integrally connected with manufacture. The “user test” was applied. This principle strongly supports ITC on solar systems supplying electricity to manufacturing units.

(iii) Saraswati Sugar Mills V/S CCE

The Court emphasized functional nexus with manufacturing activity. Electricity generation equipment satisfying manufacturing requirements should qualify.

B. Advance Rulings under GST

(i) Unique Welding Products Pvt. Ltd. – Gujarat AAR

Where solar plant is to be installed on factory roof to generate electricity to be solely and captively used for manufacturing activity within same premises and said roof solar plant, which is to be affixed on roof of building being not embedded to earth to be permanently fastened to building, such roof solar plant cannot be treated as immovable property and, therefore, applicant will be eligible for input tax credit on roof solar plant.

(ii) Shri Keshav Cement and Infra Limited- Karnataka AAR

Input Tax Credit (ITC) – Exempted supply to self – Restriction on credit – Undisputedly electricity generated by applicant in his power plant is exempted from GST, however it is an intermediate supply for use in manufacture of finished goods which are taxable – Thus, it is not a separate supply of exempted goods warranting appropriation of credit between taxable and exempted supplies – However, this ruling is subject to consumption of entire supply captively and no part of it is sold or discharged into grid or not disposed of otherwise – Section 17 of Central Goods and Services Tax Act, 2017.

(iii) Varachha Co-op. Bank Ltd. – Gujarat AAR

Roof Solar Plant is not permanently fastened to building and thus, it qualifies as a plant and machinery and is not an immovable property; therefore, it is not covered under blocked credit as mentioned in Section 17. and appellant is eligible for input tax credit on installation of roof solar plant

C. Whether Captive Consumption of Electricity is “Exempt Supply”?

• The core controversy arises from the department’s contention that since electricity is an exempt supply, the input tax credit attributable to solar power generation is liable to be restricted or reversed under Section 17(2) of the CGST Act.
• However, such proposition is legally debatable, particularly in cases where the electricity generated is entirely captively consumed, not sold, and not supplied for any consideration.
• In such circumstances, it may be argued that there is no “supply” within the meaning of Section 7 of the CGST Act, and therefore the provisions of Section 17(2) may not be attracted.
• Further, the electricity so generated merely constitutes an intermediate input/input service used in the course of manufacture of taxable outward supplies. Since such electricity is consumed as an essential intermediary in the manufacturing process and bears a direct nexus with taxable business operations, the corresponding ITC ought to remain admissible.
• Captive consumption of electricity within the same legal entity generally does not amount to a supply unless specifically covered under Schedule I, and therefore the generation and internal consumption of electricity for manufacture of taxable goods cannot automatically result in denial or reversal of ITC.

D. Whether Section 17(5)(d) Applies?

In the author’s considered view, Section 17(5)(d) should NOT apply because:

1. Solar power plants are “plant and machinery”;

2. Explanation specifically excludes plant & machinery from blockage;

3. Foundation and structural supports are expressly included in Plant and Machinery;

4. Functional test overwhelmingly supports eligibility.

The restrictive interpretation adopted by some departmental authorities appears inconsistent with settled Supreme Court jurisprudence.

5. Way Forward

Considering the litigation landscape, businesses installing solar plants should adopt the following safeguards:

(A) Maintain Proper Documentation (Section 35 of CGST Act, 2017)

Maintain:

• EPC agreements;
• technical drawings;
• electricity consumption records;
• captive usage data;
• net metering agreements.

(B) Demonstrate Manufacturing Nexus

The records and documents clearly demonstrate the nexus of electricity which is generated has been used for Manufacturing activity:

• electricity generated is substantially used in manufacturing;
• generation directly reduces production cost;
• no independent electricity trading business exists.

(C) Contract Structuring

Ensure EPC contracts clearly identify:

• plant & machinery;
• movable equipment;
• installation services;
• structural supports.

(D) Litigation Preparedness

Given aggressive departmental approach, industries should:

• obtain legal opinions;
• prepare detailed ITC eligibility notes;
• maintain judicial precedent compilations.

6. Author’s View

In the author’s considered opinion, ITC on solar power generating plants should ordinarily be admissible under GST for the following reasons:

1. Solar power systems are clearly “plant and machinery”.

2. Electricity generation is integrally connected with manufacturing operations.

3. Section 17(5)(d) specifically excludes plant and machinery from blocked credit.

4. Captive consumption of electricity does not amount to outward exempt supply.

5. Mere net metering adjustment should not defeat substantive ITC entitlement.

6. GST is designed as a seamless credit mechanism and restrictive interpretation defeats legislative intent.

7. Renewable energy promotion is a declared national policy objective and tax interpretation should align with such policy.

The controversy is likely to travel to High Courts and eventually the Supreme Court. Until authoritative judicial pronouncement emerges, litigation in this area is expected to continue.

Conclusion

The controversy surrounding ITC on solar power generating plants reflects the broader tension between:

• the seamless credit philosophy of GST; and
• restrictive interpretation relating to exempt supplies.

The stronger legal view supports ITC eligibility where electricity is primarily captively consumed for manufacturing taxable goods.

Nevertheless, due to increasing departmental disputes, taxpayers should maintain robust documentation and carefully evaluate exposure relating to, captive consumption, characterization as plant and machinery.

The issue is poised to become one of the significant renewable energy GST disputes in coming years.

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Disclaimer: The views expressed in this article are personal and based on the author’s understanding of the law prevailing at the time of writing. The contents are intended solely for academic and knowledge-sharing purposes and should not be construed as legal or professional advice. Readers are advised to independently examine and verify the relevant facts, statutory provisions, judicial precedents, and applicable notifications/circulars before acting upon the same. The author shall not be responsible for any loss or liability arising from reliance placed on this article.