In brief: 31st GST Council meeting issued a clarificatory recommendation about concessional GST for solar power projects. While this was a long-standing demand of the sector, this clarification creates more ambiguities than it solves. Sudipta Bhattacharjee (Partner, Advaita Legal) explains:
In the 31st meeting of the GST Council held on 22nd December, 2018 at New Delhi, for the first time, a much-awaited recommendation has been issued in relation to the GST applicable on ‘Solar Power Generating System’ and other renewable energy devices – the relevant portion of the press release from the Press Information Bureau, Ministry of Finance is excerpted below:
Quote: “III. GST on solar power generating plant and other renewable energy plants
- GST rate of 5% rate has been prescribed on renewable energy devices & parts for their manufacture (bio gas plant/solar power based devices, solar power generating system (SGPS) etc) [falling under chapter 84, 85 or 94 of the Tariff]. Other goods or services used in these plants attract applicable GST.
- Certain disputes have arisen regarding GST rates where specified goods attracting 5% GST are supplied along with services of construction etc. and other goods for solar power plant.
To resolve the dispute the Council has recommended that in all such cases, the 70% of the gross value shall be deemed as the value of supply of said goods attracting 5% rate and the remaining portion (30%) of the aggregate value of such EPC contract shall be deemed as the value of supply of taxable service attracting standard GST rate.”
Unquote (Emphasis added)
On a prima facie reading of the aforementioned, it appears that the Council has recommended that where goods (falling under chapter 84,85 and 94 and attracting 5% GST) are supplied along with other goods and services (attracting GST at higher rates) for a solar power plant, then 70% of the gross value of the EPC Contract would be deemed to be for supply of the said goods attracting GST at the rate of 5% and the remaining 30% would deemed to be services attracting GST at the standard rate of 18%.
While, on the first blush, this recommendation may seem to be the clarificatory, however, on a deeper reading, there appear to be a number of issues and ambiguities surrounding this recommendation, which have been highlighted hereunder:
1. Typically, clarification or minutes of the GST Council Meeting are followed by Notifications or Circulars giving effect to such minutes of the meeting. Even the aforementioned press release starts with the following words:
“The decisions of the GST Council have been presented in this note for easy understanding. The same would be given effect to through Gazette notifications/ circulars which shall have force of law”
and ends with:
“This is for information only. For exact details of changes, the notification/Circular/ Clarification may please be referred to, as and when they are issued.”
In the present case, the aforementioned clarification may involve not only issuance of a clarificatory circular but also amendment of the CGST Rules pertaining to ‘Valuation’ to allow such deemed valuation of goods and services in order to discharge GST at 5% and 18% on 70% and 30% of contract value. However, presently, no notification and/or circular has been issued giving effect to the said minutes of the 31st GST Council Meeting.
2. Presently, it is unclear as to whether the said recommendation and deeming fiction would be applicable only in cases of a single turnkey EPC contract or whether cases where parties have entered into multiple independent contracts for supply of goods, services and civil works would also be subject to the said recommendation and be read together as ‘one contract’.
On a prima facie reading of the press release, it appears that the clarification may be applicable only to a single EPC Contract as it makes a reference to the ‘aggregate value of such EPC Contract’ (as opposed to the plural “EPC Contracts”). Nonetheless, it would be prudent to wait for the actual notification/circular (if released) to take a final view on the same.
3. However, even assuming that this clarification will be applicable only to a single EPC Contract scenario, some further issues arise: practical challenges may arise at the time of invoicing and payment of taxes, as the actual supply proportion between goods and services under a single EPC Contract may not necessarily be equivalent to 70:30 and may end up being 80:20 or 90:10. This may result in a situation of artificial valuation or a scenario where an invoice is raised actually for supply of goods; however since the 70% cap is exceeded, the GST applicable on such supply may be at 18% by deeming the same as supply of services.
Also, whether in a single-contract scenario, separate billing can at all happen by treating 30% as ‘supply of services’ and 70% as ‘supply of goods’ is also debatable as the whole single EPC contract has been repeatedly held by various advance ruling authorities to be a ‘composite supply of works contract services’ liable to tax at 18% GST.
4. It is unclear as to whether this recommendation would have a retrospective effect (covering contracts entered in the past) or whether it would only apply prospectively for all future supplies/contracts.
5. Typically, many Solar Power Developers (“SPDs) import solar modules and inverters on their own account and thereafter supply the same on a free issue basis to the EPC Contractors. In the present case, it is unclear whether the ‘gross value’ and ‘EPC Contract’ as envisaged under the present recommendation would cover such free issue of modules or inverters too or would only cover the remaining supplies and services.
Thus, to sum up, the present recommendation appears to have created more confusion and ambiguities.
It would be prudent for all SPDs and EPC Contractors to await the final notification / clarification before taking any significant steps vis a vis their contract structures basis the present press release.
However, in case this recommendation is not followed by any circular and/or notification, it would be essential for the industry to seek additional clarifications to resolve the present issues after reviewing the detailed ‘Agenda’ and ‘Minutes Of Meeting’ of the 31st GST Council meeting (assuming that the same will be made public in the near future).
Authored By: Sudipta Bhattacharjee (Partner -Tax Controversy Management & Contract Documentation, Advaita Legal)
Recognized as one of the top “Indirect Tax Leaders (India)” and listed amongst the “Asia Tax Practice Leaders” by International Tax Review (“ITR”) for 2017 and 2018
Author – “GST: Works Contracts & other Construction Contracts” (Taxmann Publications, 2018)