Andhra Pradesh High Court Grants GST Relief to Solar Sector, Reduces Tax Rate to 5 Percent

In a landmark judgement, the Amaravati Bench of the Andhra Pradesh High Court has provided much-needed clarity on the Goods and Services Tax (GST) applicable to  the supply of Solar Power Generating Systems (SPGS), a decision that could significantly impact India's renewable energy sector.

The bench, comprising Justice R. Raghunandan Rao and Justice Maheswara Rao Kuncheam, ruled that SPGS, which convert solar energy into electricity, attract a 5 percent GST rate as they qualify as a 'composite supply' under GST laws. This overturned an earlier tax authority classification that treated such transactions as 'works contract' subject to 18 percent GST.

The case involved Sterling and Wilson, a prominent player in the solar EPC (Engineering, Procurement, and Construction) sector. The dispute centred on whether their transactions should be treated as 'composite supply,' attracting a reduced 5 percent GST rate as per Notification No. 01/2017-CT (Rate), or as 'works contracts,' subject to an 18 percent rate.

Sterling and Wilson argued that the nature of their solar power systems, including modules, did not constitute immovable property and should therefore be taxed as composite supplies. They had been paying GST at 5 percent but faced a reassessment notice from tax authorities, which rejected their INR 8.65 crore refund claim for input GST paid on materials between January and March 2018. The authorities contended that the solar modules, once installed, became part of immovable property and were akin to construction-related services, thus falling under the definition of a works contract.

However, the court rejected the tax authorities’ argument, ruling that solar power systems are not immovable property, as their attachment to the civil foundation is functional rather than permanent. The bench noted that the civil foundation merely supports the solar modules and does not contribute to their permanent enjoyment as a structure. Referring to legal precedents, including the Supreme Court’s decision in Excise, Ahmedabad v. Solid and Correct Engineering Works, the court clarified that solar projects qualify as composite supplies, with solar modules as the principal supply, attracting the lower 5 percent GST rate.

This judgment is a significant victory for the renewable energy sector, providing clarity on tax treatment and reducing financial burdens on solar developers. By lowering the GST rate, the decision makes solar projects more cost-effective and attractive for investors, further enhancing the affordability of solar power for consumers.