The Andhra Pradesh High Court has held that a solar power project does not qualify as a ‘works contract’ taxable at 18% goods and services tax (GST); instead, it is a ‘composite supply’ and a moveable property, attracting 5% GST.

Under the GST Act, ‘composite supply’ means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

‘Works contract’ means a contract for building, construction, fabrication, completion, erection, installation, fitting, improvement, modification, repair, maintenance, renovation, alteration, or commissioning of any immovable property where transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.

The dynamic growth of renewable energy presents distinct tax challenges in India, where the Goods and Services Tax (GST) intricacies impact the sector. The complexity of this system poses challenges for businesses operating in renewable energy, requiring a closer look at GST in this context on both the output and input sides.

Mercom had written about how GST intricacies impact the renewable energy sector, requiring a closer look at taxation.

Background

The petitioner, Sterling and Wilson, had been paying GST at 5% on its turnover from solar power projects. The company’s refund application for ₹86.5 million (~$1 million) input tax credit for January to March 2018 under Section 54 of the GST Act triggered a fresh tax assessment by the authorities.

The assessing authority issued a notice reclassifying the company’s transactions as ‘works contract,’ taxable at 18%. It raised a tax demand of ₹630 million (~$7.28 million), including a penalty of the same amount.

Aggrieved, Sterling and Wilson appealed to the Appellate Authority, which partially reduced the penalty but upheld the 18% tax rate. The company filed a writ petition before the High Court, citing a lack of alternative remedies as GST appellate tribunals had not been constituted at the time.

The petitioner argued that their activities fell under the ‘composite supply’ category defined in Section 2(30) of the GST Act, making them eligible for the 5% GST rate. It also contended that the Appellate Authority classified the supply as a ‘works contract’ by misinterpreting legal provisions and considering irrelevant factors.

The respondents, represented by the Government Pleader for Commercial Taxes, maintained that the petitioner’s solar modules and other goods were integral to an immovable structure, qualifying as a ‘works contract’ under Section 2(119) of the GST Act. They argued that the nature of the completed projects—solar projects embedded in the earth—supported this classification.

Court’s Analysis

The High Court, referring to previous judgments of various courts, concluded that solar projects are not embedded in the earth and cannot be classified as immovable property.

It held that a solar-generating power station is a ‘composite supply,’ not a ‘works contract.’

Subscribe to Mercom’s real-time Regulatory Updates to stay informed about critical updates from the renewable industry.