GST Council said that they are discussing the tax structure for renewable energy engineering, procurement, and construction (EPC) contracts at its 57th GST Council meeting. The GST rate reduction might be considered by the council from 18% to 5% on the service elements of such contracts, aligning it with that on renewable energy equipment.
An EPC contract is a model leveraged in large-scale infrastructure and energy projects. Under the agreement, a single contractor has the obligation to deliver a fully operational project to the owner from start to finish, managing everything from design and equipment sourcing to final construction.
The 8.9% is the current effective GST rate for the contract. The taxation of EPC contracts for renewable energy and other infrastructure projects is regulated by a 70:30 formula. 70% of the contract value is deemed to be a supply of goods and is levied at 5% GST, while 30% is categorised as a supply of services, which is subject to an 18% rate.
The 8.9% is the effective tax rate, but the industry is seeking a flat rate of 5%, which can be discussed in the next meeting.
Input goods and services are subject to an effective tax rate of 8.9%, while the final generation and supply of electricity are exempt from GST. Because electricity output is not subject to GST, project developers are unable to use their GST Input Tax Credits (ITC) to offset their output tax liability.
A lower rate of 5% would lead to reduced ITC accumulation and reduce the inverted duty impact. The same problem has been mentioned by the industry. ITC accumulation will arise if the inputs are levied at a higher rate compared to the output.
There is an 18% tax on Glass and metal at present, a 5% tax on solar panels, and an 18% tax on EPC services. If the tax on the EPC component is increased to rectify the rate difference, the cost of alternative energy will be affected. GST reduction in the services component shall enhance cost predictability and support faster renewable energy deployment.
The GST reduction on renewable energy equipment was effective for project economies. However, we would consider further simplification of the tax structure and more transparency on EPC contracts to enhance cost predictability and support faster renewable energy deployment. The effective GST rate before September 2025 on EPC contracts was 13.8%.
The tax burden will be reduced on renewable projects if the services portion is also drawn under the 5% GST rate, bringing transparency on the treatment of EPC contracts. It also lessens the risk of disputes.
The 70:30 allocation can cause tax litigation over whether the actual value of services (civil work, installation, engineering) surpasses 30%. A flat 5% rate would streamline compliance for both developers and tax authorities.
Proving to authorities that services did not exceed 30% of the total contract value is challenging for the industry. Implementing a flat rate of 5% would reduce confusion.
Also Read: GST Impact on Solar Project Prices in India
For example, on April 29, the Andhra Pradesh High Court quashed an 18% GST demand raised against Tata Power Renewable Energies on the whole value of its solar power-generating system supplies. The court did not accept the tax department’s claim that the 70:30 procedure did not apply because Tata Power had raised separate invoices for goods and services.
