FEBRUARY 06, 2019

By Kunal Nikumbh

RENEWABLE Energy Sector is a major source of Power to the country. Time and again, the government has emphasized on the need for generation of energy from renewable sources and also encouraged investment in this sector. In the year 2015, the Government of India announced a target for 175 GW cumulative renewable power installed capacity by the year 2022. The Annual report of Ministry of Natural Resource and Energy for FY 2017-18 has stated that a capacity of 62.84 GW has been set up by December 2017 and this constitutes 18 per cent of the total installed capacity.

However, like any other industry, even this sector is no exception to the industry wide turbulence caused due to the introduction and implementation of Goods and Services Tax ("GST"). This article deals with the confusion and doubts created on account of the recent notifications issued under GST pursuant to the 31 st meeting of the GST Council, in respect of the renewable energy sector, particularly the Wind Energy and Solar Power Sector.

In order to be able to understand the problems created due the recent amendment, it is pertinent to have a quick overlook of the relevant provisions governing the issues and the brief background to it.

Overview of the Relevant Legal Provisions governing the issue

Sl. No. 234 of Schedule-I of Notification no. 1/2017-Central Tax (Rate), inter alia, prescribes the rate of 5% GST for supply of Windmill or Wind Turbine Generator ("WTG") /Solar Power Generating System ("SPGS").

Further, section 2(30) of the Central Goods and Services Tax Act, 2017 ("CGST Act") defines the term "Composite supply" to mean a supply consisting of two or more taxable supplies of goods or services or both, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, and one of which is a principal supply. A composite supply shall be treated as a supply of the principal supply only in terms of Section 8(a) of the CGST Act.

Therefore, once the principal supply is identified, the tax treatment (rate or exemption) applicable to such principal supply would apply to the entire composite supply.

Further, 'Works Contract' as defined under Section 2(119) of the CGST Act means a contract for building, construction, erection, installation, commissioning, etc. of any immovable property wherein transfer of property in goods is involved in the execution of such contract" Sl. No. 6 of Schedule II of CGST Act specifically deems a 'works contract' as supply of service.

Sl. No 3 of Notification no. 11/2017-C.T. (Rate) dated 28.6.2017 provides a rate of 18% GST on the supply of works contract services.

Legal position in Wind and Solar Power Sector prior to the amendment

As an industry practice, the Suppliers of WTG/ SPGS enter into EPC contract with the customers, whereby the supplier is not only required to supply the parts of WTG/SPGS to the customer, but is also required to undertake erection, installation and commissioning of the WTG/SPGS. The supplier is also responsible for setting up the necessary evacuation system such as sub-stations, transformers, etc. and obtaining the necessary approvals for the land and right of way to the said WTG/SPGS.

As it is highly probable that such EPC contracts would amount to construction of an 'Immovable property', it would qualify as 'Works contract' and would be leviable to GST at the rate of 18%. Consequently, the supplier ends up losing the benefit of concessional rate of 5% GST provided for supply of WTG/SPGS under Sl. No. 234 of Notification no. 1/2017 - C.T. (Rate) dated 28.6.2017. This would create a tax burden on the renewable energy sector, especially when the proportion of value of WTG/SPGS is approximately 80% to 85% of the entire contract value.

In a bid to prevent the entire contract from getting taxed at the rate of 18%, and to avail the concessional rate of 5% for the supply of WTG/SPGS, certain players in the industry were exploring the option to enter into separate contracts with the customer for Supply of the goods (falling under Sl. No 234) and for supply of erection, installation and commissioning service and evacuation infrastructure. The supplier would treat each of the above contracts as separate supply, pay GST at the rate of 5% on the supply of goods and at the rate of 18% on service contract independently. The above modus operandi seemed to provide relief as the major chunk of the contract (i.e. supply of goods) would be taxed at 5%.

Alternatively, certain suppliers treated the supply, erection and installation of WTG/SPGS as a 'composite supply' with the supply of solar modules or solar panels being the principal supply and availed the concessional rate of 5% GST under Sl. No. 234 of Notification no. 1/2017 - C.T. (Rate).

Amidst the confusion, the Advance Ruling Authority (AAR) has ruled that EPC contract are in nature of 'Works contract' and held that the entire contract would be leviable to GST at the rate of 18% in terms of Sl. No. 3 of Notification no. 11/2017 - C.T. (Rate) in the following cases -

i. Dinesh Kumar Agrawal - 2018-TIOL-55-AAR-GST - Maharashtra AAR

ii. Giriraj Renewables Pvt. Ltd. - 2018-TIOL-12-AAR-GST - Maharashtra AAR

iii. Fermi Solar Farms Pvt. Ltd - 2018-TIOL-17-AAR-GST - Maharashtra AAR

Legal impact of Recent Amendments -

Notification No. 24/2018-C.T.(Rate) dated 31.12.2018, issued pursuant to the recommendations made by the GST council in its 31 st meeting, has added an Explanation to Sl. No. 234 of Notification No. 1/2017-C.T. (Rate) which reads as under-

"Explanation: If the goods specified in this entry are supplied, by a supplier, along with supplies of other goods and services, one of which being a taxable service specified in the entry at S. No. 38 of the Table mentioned in the notification No. 11/2017-Central Tax (Rate), dated 28th June, 2017 [G.S.R. 690(E)], the value of supply of goods for the purposes of this entry shall be deemed as seventy per cent. of the gross consideration charged for all such supplies, and the remaining thirty per cent. of the gross consideration charged shall be deemed as value of the said taxable service.";"

Further, Notification No. 27/2018-Central Tax (Rate) dated 31.12.2018 has inserted a new entry at Sl. No. 38 of Notification no. 11/2017 - C.T. (Rate) dated 28.6.2017 which, inter alia, prescribes a rate of 18% for supply of construction or engineering or installation or other technical services in relation to setting up of WTG/SPGS. The explanation to this entry states that the entry shall be read in conjunction with Sl. No. 234 of Notification No. 1/2017 - C.T. (Rate) dated 28.6.2017.

Thus, the Explanation to Sl. No. 234 of Notification no. 1/2017-C.T. (Rate) dated 28.6.2017 creates a deeming fiction, with respect to the value of goods specified under Sl. No. 234 in a case where such goods are supplied along with other goods and services, including the services mentioned under the newly introduced Sl. No. 38 of Notification no. 11/2017 - C.T. (Rate) dated 28.6.2017.

It states that where a supplier supplies WTG/SPGS to its customer along with other goods and service mentioned under Sl. No. 38 of Notification no. 11/2017 - C.T. (Rate) dated 28.6.2017, the value of supply of WTG/SPGS would be deemed to be 70% of the Total consideration charged for all such supplies and would be subject to GST at the rate of 5%. The remaining 30% of the Total consideration charged would be treated as value of services supplied to the customer and would be levied to GST at the rate of 18% under Sl. no. 38 of Notification no. 11/2017-C.T. (Rate) dated 28.6.2017.

Although the intention of the government in making the aforesaid amendments seems to resolve the issues under GST on supply of WTG/SPGS, the amendments have only added to the chaos and confusion of the players in Wind and Solar industry.

Some of the issues that have cropped up before the industry as a result of the aforesaid amendments are discussed as under-

1. Applicability in case of Separate contracts?

The aforesaid Explanation to Sl. No. 234 would be applicable in cases where the supply of goods mentioned under Sl. No. 234 is made "along with supplies of other goods or services". The wordings of the explanation are ambiguous and creates a doubt as to whether the supply of goods and erection and installation service made under separate contracts can be said to be made "along with" each other.

2. Whether amendment overrides 'Composite Supply' concept?

Certain players in industry have been treating a single contract for supply, erection, installation and commissioning of WTG/SPGS as a composite supply under Section 2(30), with supply of solar modules/solar panels being the principal supply. By virtue of Section 8(a) of CGST Act, a composite supply would undergo the same tax treatment as that of the principal supply. However, due to the deeming fiction created by the newly inserted explanation to Sl. No 234 above, even a composite supply appears to have been bifurcated into supply of goods and supply of services by the deeming fiction. This completely defeats the concept of 'composite supply' created by the CGST Act.

3. Applicability in respect of Works Contract?

Taking note of the recent advance rulings under GST, certain industry players had treated the contract for supply, erection, installation and commissioning of WTG/SPGS as a works contract. Sl. No 6 of Schedule II deems a composite works contract as a 'supply of service'. On the other hand, Sl. No. 234 of Notification no. 1/2017-C.T. (Rate) dated 28.6.2017 provides rate of GST in case of 'supply of goods'. Thus, once the works contract is treated as one 'supply of service' only, whether explanation under Sl. No. 234 of Notification no. 1/2017-C.T. (Rate) would apply to such contract. If the answer to above question is negative, then the problem faced by the industry (loss of benefit of 5% rate) prior to the aforesaid amendments would still exist. If the answer to the above question is affirmative, then the deeming fiction created by Sl. No. 6 of Schedule-II would not reach a logical conclusion.

4. Whether explanation will apply to other goods supplied under contract as well?

The explanation to Sl. No. 234 provides that 70% of ' gross consideration ' charged for all supplies shall be taken as value of supply of goods for the purpose of Sl. No. 234. This raises a concern regarding the applicability of the explanation to the goods other than those covered under Sl. No. 234 which are also supplied as a part of the contract. Further it is also questionable as to whether the value of goods forming part of evacuation infrastructure would be included in the "gross consideration charged" for determining the 70% value.

5. Subsidiary, an escape route?

Due to the actual proportion of value of goods (of WTG/SPGS) being close to 80% to 85% of the total contract value, suppliers will find it beneficial to not pay GST in accordance with Explanation to Sl. No. 234 (i.e. by treating only 70% of contract value supply of goods). Thus, it will not be a surprise to see the industry players undertaking the erection and installation activity through their subsidiary companies. However, since the parent company would offer performance guarantee in respect of contract undertaken by subsidiary, it is highly doubtful that the department would treat such contract as two separate contracts.

6. Position in respect of existing contracts?

There is no clarity as to whether the explanation to Sl. No. 234 would also apply in respect of contracts which are entered into between the parties prior to the effective date of the aforesaid amendment (i.e. 1.1.2019). The problem in this case is more serious where the supplier have treated such contracts as composite supply of WTG/SPGS and discharged tax at the rate of 5% on the entire value of invoices raised prior to the said amendment.

Thus, although the intention of the making the aforesaid amendment appears to be providing relief to the Wind and Solar power industry, it is not clear as to whether the said amendments have achieved its intended purpose. Therefore, the players in the Wind and Solar Industry would have to keep the abovementioned factors in mind while deciding the business structure and pray that a clarification is quickly issued by the CBIC in this regard.

(The author is Senior Associate, Lakshmikumaran & Sridharan, Attorneys, Mumbai and the views expressed are strictly personal)