SEPTEMBER 28, 2018

By K Srinivasan, IRS

WHEN, the solar power generating system described in the entry 234 of Notification No. 1/2017–CTR, will be occasioned to be classified under the said schedule entry @5% tax, is the most eagerly awaited package from the GST Council of India, the Supreme body of indirect tax in the Country?

It does not appear to be like a near reality, looking at the AAAR Maharashtra's Orders in the case of Fermi Solar Farms Pvt. Ltd - 2018-TIOL-12-AAAR-GST and Giriraj Renewables (P) Ltd. - 2018-TIOL-13-AAAR-GST

However, the Karnataka Appellate Authority for Advance Rulings in the same case of Giriraj Renewables - 2018-TIOL-16-AAAR-GST, held a diametrically opposite view that supply of Photovoltaic (PV) module is a distinct transaction by itself and cannot be said to be naturally bundled with supply of remaining components and parts of 'solar power plant' and hence only to the remaining extent a 'composite supply' of Works Contract.

It notes further that appellant has vivisected the contract into two parts in the initial stage itself i.e. first a supply of Photovoltaic (PV) module which forms about 60-70% of the contract value and second for supply of remaining parts and components and services.

The AAR in the analysis has evaluated the concept of "composite supply" and the related chief requisite of the expression "naturally bundled" occurring in Composite Supply under Section 2(30) of the CGST Act, 2017.

The AAR had observed that in a scenario where the entire contract qualifies as a composite supply for setting up of the power plant, then all supplies (including the principal supply) in relation to the said contract should have been supplied by the Contractor himself. Then, there will be an inter-link between these supplies.

In the given contracting structure, the major component (including price proportion) i.e. the PV modules, for the purpose of setting up of the power plant, is supplied by the Owner to the Contractor and not by the Contractor to the Owner.

The Karnataka AAR also observed that the draft contract as well demonstrates that in such projects, the Owner could procure the major equipment on their own, with the Contractor only carrying out the supply and services portion in respect of the residuary bit of the contract.

Hence, a claim that the same is a naturally bundled and related tax position of it being a composite supply is incorrect and unsustainable as per the AAR.

Either with or without the said split in terms of scope and price of a particular supply, a contention that all the supplies in setting up of a power plant are naturally bundled, would be unfair as much as trying to levy 18% to Solar Power Plant in the Country, the Author would like to think.

It further notes that the tax liability on this portion of the contract in question (other than PV module) which is termed as 'composite supply' will be determined in terms of Section 8 of the CGST Act, 2017 wherein the rate applicable to the dominant nature of the supply will prevail.

The Karnataka AAR accordingly upheld a levy of GST as is applicable on each individual supply; entailing a concessional 5% rate on 70% of the total supply i.e., PV modules and 18% rate on the remaining 30% of the Supply i.e. Other goods and Services.

Can any Solar Power Plant/ Power generating system, covered under the said entry of the schedule, ever be imagined to be commissioned without the aid of certain residual goods and services besides the PV Modules?

This, at least looks like a compromising model considering the relief it affords to the dominant supply of the Power Plant @ 5% tax while retaining the mandate to tax the residual part to 18% tax, as per the Author.

What is a composite supply after all? Is it not a naturally bundled supply of goods and services, of which the principal supply shall be the criterion to decide the Classification of the said composite Supply?

The parts of the power plant / power generating system are classified such that to attract 5% levy, as principal supply, keeping in view the power needs of the country.

Instead, if you go by a prosaic definition of works contract whose definition as a service is both fictional and un-understandable in terms of Para 6(a) of Schedule II read with Section 2(119) of the CGST Act, it is very unlikely that Solar Power Plants will see the light of the day under GST.

The above dispensation under GST is even a bit contrary to Article 366(29A) which is still in force, defining such services as both goods and services allowing it to be vivisected and taxed in terms of the extent /content of each of such component of those contracts.

The fact that GST follows a concurrent taxing jurisdiction, of Centre and the States, does not still hurt one from segregating goods and services separately and taxing them accordingly, so long as the tax share is equal between the Center and the State.

As per the principle of classification of parts of a machinery /system, in disassembled or unassembled condition, parts must be classified as that of the parent article, so long as they possess the essential characteristics of the parent article.

The above broad rule will find ample application to any instance of a composite supply of a machinery / system. The fact that such a supply is also rolled into the overall Contract of assembly / erection / commissioning, need not take away the concessional tax benefits conferred @5% for the principal supply, namely, power generation plant / systems/Parts meant to meet the power needs of the country and people.

The additional work of installation and commissioning of the plant is definitely a divisible and a separate function. It would be both reasonable and logical to divide it into two parts and levy the insubstantial goods and service part to a higher tax of 18% and levy the dominant goods part of the power plants to 5% concessional tax, which is the policy object of the Government.

The impression one gathers otherwise from the reading of the definition of Works contract as given in Section 2 (119) of the CGST Act read with Para 6(a) of Schedule II to the said Act is that it confines itself to movable property and would be only ostensibly so.

A major dichotomy is supposed to have been done by the introduction of the said definition of works contract with the help of sub clause (b) of Clause 29A of Article 366, to keep works contract as a service, confined to only movable and indivisible contracts that does not result in Immovable property.

In case of an Immovable property, if you take a lift for example, on its commission, gets value added to Immovable property, and would be taxed to the extent of 12% to 15% by the local government by way of stamp duty which has no facility of any ITC.

If you charge it as works contract under GST, by imposing 18% as composite supply of service without the facility of ITC to the construction (of Immovable property) service, the cost of housing will be far from affordable, contrary to the policy statement of the government.

Further, there is a cloud of doubt shrouding the definition of service under Article 366 (26A) itself as it is imprecise, dubious and open-ended to accommodate anything even other than goods, under it.

The policy statement / object of the reform must be allowed to dictate the rates and not the rulebooks. They are merely a means to achieving the economic end.

It is not okay for the government to subject the entire power plant to 18% since some AAR's advocate a narrow interpretation of it to charge the entire Solar Power plant to 18% tax, just because the contract is composite including its erection and Commission.

These Authorities for Advance Ruling have possibly held the supply in the Contract to be a composite supply of works contract service; essentially on the premise of a solar power plant being an immovable property, strictly going by the definition of Section 2(119) of the CGST Act read with Para 69(a) to Schedule II of the said Act.

It is note-worthy that Maharashtra AAAR very recently in case of Fermi Solar Farms Pvt. Ltd. (supra) and Giriraj Renewables (supra) has held that the entire Supply of 'solar power generating system' constitutes composite 'works contract'.

It was not as though that they did not acknowledge the fact that a solar power plant could be moved in exceptional cases, and that however the intention of the contract would matter in such cases whether to create an immovable property or not as per the terms of Contract.

Is it not the duty of the lawmakers to introspect about the tax rates like in this instance and align the laws with the policy objects of the government?

The narrow and provincial approach of the tax administrators, it is feared might derail the reform itself, by the user unfriendly system, followed by a tax overload, it has come to assume.

(The author is Assistant Commissioner, GST, Chennai and a Master Trainer, GST. The views expressed are strictly personal)