BENGALURU: Though solar 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 goods’?”