In brief: 31st GST Council meeting issued a clarificatory recommendation about concessional GST for solar power projects pursuant to which notifications have been issued with effect from 1st January 2019. While this was a long-standing demand of the sector, this clarification and notifications create new ambiguities. Sudipta Bhattacharjee (Partner, Advaita Legal) explains:
AMBIGUITIES TO CONTINUE APROPOS GST AND SOLAR POWER IN 2019?
In the 31st meeting of the GST Council held on 22nd December, 2018 at New Delhi, for the first time, a much-awaited recommendation was issued in relation to the GST applicable on ‘Solar Power Generating System’ and other renewable energy devices – This was implemented vide Notification No.24/2018-Central Tax (Rate) which came out late night on 31st December 2018 and which adds the following Explanation to entry 234 of the CGST Rate Notification No.1/2017-Central Tax (Rate):
“Explanation: If the goods specified in this entry are supplied, by a supplier, along with supplies of other goods and services, one of which being a taxable service specified in the entry at S. No. 38 of the Table mentioned in the notification No. 11/2017-Central Tax (Rate), dated 28th June, 2017 [G.S.R. 690(E)], the value of supply of goods for the purposes of this entry shall be deemed as seventy per cent. of the gross consideration charged for all such supplies, and the remaining thirty per cent. of the gross consideration charged shall be deemed as value of the said taxable service.”:
Further, a new Entry 38 has been added in the notification No. 11/2017-Central Tax (Rate) pertaining to rate of services – this prescribes a 18% GST rate for Services under chapter 9954 (pertains to ‘Construction services’) or 9983 [pertains to ‘Other professional, technical and business services (except research, development, legal and accounting services)’] or 9987 (pertains to ‘Maintenance, repair and installation (except construction) services’) “by way of construction or engineering or installation or other technical services, provided in relation of setting up of” Bio-gas plant, Solar power generating system, Waste to energy plants / devices etc.
Prima facie, the following conclusions/doubts emerge from the above notifications, when read together with the recommendation from the 31st GST Council meeting (Readers may also refer to my article on the GST Council recommendations published by Solarquarter at https://www.solarquarter.com/index.php/16054-ambiguities-to-continue-apropos-gst-and-solar-power-in-2019, for greater context):
- It appears that the newly added Explanation to entry 234 applies only to a scenario where one supplier is supplying goods specified in entry 234 falling under chapters 84,85 and 94 along with supplies of other goods (neither falling under entry 234 nor under chapters 84,85 and 94) and services (including one of the services mentioned in entry 38 above). In such a scenario, whether one contract has been entered into with the said supplier or multiple contracts, 70% of the gross consideration for all such supplies will be liable to GST as a ‘supply of goods’ at 5% under entry 234 above and remaining 30% will be liable to GST as a ‘supply of service’ at 18% under entry 38 above
- By necessary corollary of the above point, this explanation will not apply when contracts have been entered into by Solar Power Developers (SPDs) with multiple contractors as opposed to one contractor
- It is not completely clear if this will apply to a scenario when SPDs procure items like modules/invertors etc on their own and supply them FoC to the contractor(s) for use in setting up of the solar project.
- It has not been specifically clarified as to whether this explanation would be treated as a clarification and therefore would have a retrospective effect or whether it would only apply prospectively for all future supplies/contracts. It is possible to take a view that, given that a new and specific deeming fiction is being introduced vide this Explanation, this explanation will apply only prospectively for all future supplies/contracts.
- Whether in a single-contract scenario, can separate billing at all happen by treating 30% as ‘supply of services’ and 70% as ‘supply of goods’ is 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.
- Last but not the least, practical challenges may arise at the time of invoicing and payment of taxes (in scenarios where this Explanation will apply), 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
Thus, to sum up, the present recommendation appears to have created some new ambiguities en-route to solving old doubts.
It may be relevant for the industry to seek additional clarifications to confirm the above understanding and resolve the doubts expressed above.
To read the earlier update on the subject matter Click here
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