Solar Plant: Setting up solar plants is set to become even cheaper; the government is preparing to cut taxes directly by 4 percent..

The government may announce significant relief measures to promote renewable energy. In particular, a substantial reduction in the cost of setting up solar plants is anticipated. The GST Council has expressed its intention to grant major tax concessions on Engineering, Procurement, and Construction (EPC) contracts for renewable energy during its upcoming meeting in October. If implemented, this could lead to significant GST relief for solar energy plant installations, making the process more affordable in the future.

Sources indicate that the GST Council has begun considering a proposal to reduce the GST rate on the service component of these contracts from 18 percent to 5 percent. This move would benefit developers of solar energy projects. EPC contracts serve as a model for executing large-scale energy projects and developing the necessary infrastructure; under such agreements, the contractor is responsible for completing the entire project and handing it over to the owner. The scope of work encompasses everything from design and equipment procurement to final construction.

**Current GST Rates**
Under existing GST provisions, the effective tax rate for setting up solar plants is approximately 8.9 percent; however, the Council has decided to apply a flat 5 percent rate, resulting in a direct saving of 4 percent. A 70:30 formula applies to EPC contracts: 5 percent GST is levied on 70 percent of the costs, while 18 percent GST is charged on the remaining 30 percent. This is because the government classifies 70 percent of the contract value as equipment and materials (subject to 5 percent GST) and the remaining 30 percent as services (subject to 18 percent GST). Industry stakeholders have demanded a flat 5 percent GST rate across the board, a proposal that may be discussed in the next meeting.

No ITC Benefit
The industry points out that while the combined effective GST rate on equipment and services stands at 8.9 percent, the electricity supplied by these projects is exempt from GST. Since the output itself does not attract GST, project developers are unable to claim Input Tax Credit (ITC). Industry stakeholders argue that if a flat 5 percent GST were applied, the ITC accumulation would be lower, thereby avoiding an excessive financial burden on them.

ITC: The Major Issue
The industry identifies ITC refunds as its primary concern. ITC benefits are realized when input taxes exceed output taxes. Currently, glass and metal used in these projects attract 18 percent GST, whereas solar panels are taxed at 5 percent; EPC services also incur an 18 percent GST charge. Consequently, the taxes paid during project construction cannot be claimed back against the output. The industry maintains that implementing a flat 5 percent GST rate could resolve the entire dispute.

Disclaimer: This content has been sourced and edited from News18 Hindi. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.