panels and related equipment attract goods and services tax (GST) at a concessional rate
of only 5%, solar developers who employ contractors to supply the panels and
set up their projects are getting a ‘service’ performed for them, and hence
should pay 18% GST, the rate applicable for services, the Maharashtra Authority
for Advance Ruling(MAAR) has ruled.
“The agreements tendered ... reveal
that the transaction of setting up and operating a solar photovoltaic plant is
in the nature of a ‘works contract’,” said the two member bench of B. V.
Borhade, Joint Commissioner of Sales Tax, Maharashtra, and Pankaj Kumar, Joint
Commissioner of Central Taxes, which was constituted last year to decide in
advance on any matter relating to GST, in a recent judgment. “The rate of tax
would be 18% under the IGST Act, or 9% each under the CGST and MGST Acts,
aggregating to 18%.”
Since solar developers hardly ever build their
own projects but use contractors, the ruling, which is almost certain to serve
as a precedent for other states as well, in effect takes away the advantage of
the concessional GST rate for solar panels from them. It will increase their
tax burden and in turn may well raise solar tariffs at future auctions.
The petition filed before MAAR by Fermi
Solar Farms, a leading EPC contractor, had noted that setting up solar projects
usually involve two separate contracts with the developer – one for supply of
goods, which includes solar panels and related equipment , and the other for
setting up the plant, erecting civil works, connecting transmission lines, etc.
It had argued that the GST rate for the first contract should be 5% and for the
second, 18%. MAAR’s ruling, however, concluded that both contracts should
invite GST at 18%.
MAAR noted that a solar plant consisted of a
host of equipment – solar panels and inverters merely being the most prominent
– which were put together on the site by the contractor to form a solar power generating
system (SPGS). “A solar power generating system is not available as a system as
such,” its ruling said. “The agreement very clearly mentions that the buyer
desires to purchase an end-to-end SPGS with various integral components. Thus
the buyer has expressed a clear intent to purchase an SPGS with the various
components and not the components merely... The supplier is appointed not
merely to supply the equipment, but there is design and engineering work even
before the supply of equipment... The agreement does not stop at supply of
equipment but extends to implementation, operation and maintenance as well....
On what basis can such a contract be termed a contract merely for ‘supply of