Advance Ruling on Construction of Solar Plant with Case Law Study: Advance ruling mechanism under GST is at the state level and here, we have a case where two different state advance ruling authority has given two different ruling. This has put the taxpayers in a fix. In case of Construction of Solar Plant, the issue was whether the Construction of Solar Plant is a ‘Works Contract’ and liable to 18% GST or ‘Composite Supply’ and liable to concessional rate of 5%.
As per Section 2(30) of CGST 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 thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.
As per Section 2(90),Principal Supply means the supply of goods or services, which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary.
As per Section 2(119) of CGST Act, Works Contract means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration, or commissioning of any immovable property wherein, the transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract ” Works contract has been deemed to be a service under GST – Schedule II of GST law specifies that composite supply of works contract would be deemed to be a service. The general rate of works contract service is 18%.
The AAR ruling came in response to an application by M/s Giriraj Renewables Private Ltd. who is an EPC contractor and has entered into agreement with various developers who desire to set up and operate solar photovoltaic plants for supply of generated power. The contracts are for supply of goods as well as services. The applicant has contended that:
- The agreement is construed as a composite supply; the principal supply would be the supply of PV Modules which again are liable to tax @ 5%.
- He is engaged in the business of supply of ‘solar power generating system’ and the same should be liable to tax at 5%.
- The proposed agreement with its customers should be taxable @5% GST, and the same should be applicable to subcontractors as well.
Karnataka Authority of Advanced Ruling (AAR)
- The major component (PV Module) said to have constituted 70% of the whole project procured by the owner himself. Therefore, the same cannot be construed as a principal supply by the applicant and hence, it cannot be construed to be a principal supply of the project and thereby cannot be a composite supply.
- EPC contract for the construction of solar power project in which both goods and services are supplied cannot be interpreted as a composite (a mix of components, which make up a solar project) supply contract. Therefore, the supply of each component in a ‘Solar Power Generating System’ cannot have a flat tax rate of 5 percent GST.
- Further, the authority clarified that the rate of GST will depend on the supply type as the sub-contractor is an individual supplier and cannot avail any GST at concessional rate.
Maharashtra State Authority of Advanced Ruling (AAR)
Has, in response to an application by Giriraj Renewables Pvt. Ltd., clarified that irrespective of the fact that there are separate contracts for supply of goods and services for a solar power plant, the entire project of setting up and operation of a solar photovoltaic plant shall qualify as a works contract and shall be taxable at 18%.
Two separate Authorities for Advance Rulings (AAR) on the GST rate applicable on installation of solar plants have thrown the solar industry into confusion. The industry has knocked at the doors of the government seeking clarity on the matter.
Two rulings, from the Maharashtra AAR, have favored a GST rate of 18%, treating installation as a whole works contract. The Karnataka AAR, however, has ruled to treat installation at the concessional rate of 5% applicable on equipment. The challenge for the applicant is as he has to maintain it differently in both the states as one has given it at 5% and another at 18%.
To avoid such confusion, it may be proposed to have a central body for advance ruling so that the trade and industry can really benefit from the same. The current mechanism does not have any representation from the Judiciary and for this a petition is already filed in the High Court of Gujarat and it posted for hearing on 2nd July 2018. Keeping in view of all the above, the advance ruling mechanism should be revisited in GST else it will defeat the objective of having such a mechanism.