Solar EPC GST and Input Tax Credit for Indian Factories in 2026

A factory should not treat GST on a solar EPC contract as automatically 8.9% or automatically recoverable as input tax credit (ITC). Since 22 September 2025, specified renewable-energy devices are covered by a 5% goods entry, while a qualifying bundled project supply retains the notified 70:30 deemed split between goods and service. That arithmetic produces an indicative 8.9% incidence when the service portion is taxed at 18%, but classification, contract structure, place of supply, recipient use and Section 17(5) must be reviewed for the actual transaction.

Key Takeaways

• Notification 9/2025-Central Tax (Rate), effective 22 September 2025, placed listed renewable-energy devices and parts under a 5% goods entry, superseding the earlier 12% schedule.
• The 70:30 rule applies to the specified bundled supply described by the notification; it is not a universal ratio for every solar invoice.
• The current indicative 8.9% is arithmetic: 70% × 5% plus 30% × 18%.
• Independent balance-of-system items can retain their own HSN classification and rate.
• ITC depends on Sections 16 and 17, including fact-specific analysis of the immovable-property restrictions in Section 17(5).
• Compare tax-inclusive proposals using the solar EPC quote guide.

Why do solar EPC quotations show different GST treatments?

“Solar EPC” is a commercial label, not a complete GST classification. One vendor may supply an integrated power project for a single consideration. Another may invoice modules, inverters, structures, cables, civil work and commissioning separately. A third may provide labour while the factory buys equipment directly. Those facts affect classification and valuation.

Notification 8/2021-Central Tax (Rate) moved specified renewable-energy devices and parts under Chapters 84, 85 or 94 to a 12% aggregate rate from 1 October 2021. Notification 9/2025-Central Tax (Rate), effective 22 September 2025, superseded that goods schedule and now places the listed devices under Schedule I: 2.5% central tax plus corresponding state tax, or 5% IGST. The list includes solar-power-based devices, solar power generators and photovoltaic cells, assembled or not in modules or panels. Do not extend the entry to every solar-plant component. Iron, steel and aluminium mounting structures independently classified under headings 7308 or 7610 remain outside that device entry and require their own current rate check.

When does the 70:30 solar-project rule apply?

The explanation to entry 201A addresses a supplier providing specified goods along with other goods and services, one of which is the taxable service referenced in entry 38 of Notification 11/2017-Central Tax (Rate). For that covered arrangement, 70% of gross consideration is deemed to be the value of the specified goods and 30% the value of the taxable service.

This is illustrative; the deemed split does not prove cost shares.

What if goods and services are genuinely independent?

Separate purchase orders do not by themselves settle the question. Tax authorities can examine whether supplies are naturally bundled, whether one contractor bears integrated performance responsibility, whether prices are artificial, and whether contracts are interdependent. Conversely, genuinely independent module purchases, equipment supplies or installation services may be classified and taxed on their own terms.

Map each line to description, HSN or SAC, rate, supplier, consideration and obligation, with a GST professional validating treatment.

Are balance-of-system components always taxed at 5%?

No. “Balance of system” (BoS) can include structures, cables, switchgear, transformers, earthing, monitoring, civil works and evacuation equipment. An item does not enter the renewable-device schedule merely because it supports solar generation. Its design, description, tariff heading and whether it is supplied within a covered project arrangement matter.

Can a factory claim input tax credit on solar EPC GST?

Sometimes, but never solely because the invoice contains GST. Section 16 of the CGST Act sets baseline conditions, including possession of a valid tax invoice, receipt of supply, supplier-furnished invoice details as prescribed, tax payment to government and filing of the return. Payment and document-matching rules also matter.

Section 17 then apportions or restricts credit in relevant cases. A factory using electricity for taxable outward supplies may have a business-use argument, but exempt turnover, non-business use and blocked-credit provisions can alter the result. Section 17(5)(c) and (d) restrict certain works-contract services and goods or services used to construct immovable property on own account, other than plant and machinery, subject to their text and exceptions.

Is a rooftop solar plant “plant and machinery” for ITC?

That is a fact-and-law conclusion, not a phrase to insert in a purchase order. The statutory explanation, method and degree of attachment, functionality, civil foundation, ownership, capitalisation and judicial or advance-ruling context may be relevant. Rooftop equipment can be removable in one installation and deeply integrated in another. Accounting classification as plant does not automatically control GST law.

Obtain a written opinion for material amounts. Preserve drawings, foundation details, bills of material, component warranties, dismantling method and the business-use trail. Avoid categorical statements such as “100% ITC guaranteed.”

How should the CFO model GST and ITC?

Build cash flow with ITC as a timed, conditional recovery rather than reducing day-one project cost automatically. A practical model contains three scenarios:

Suppose a ₹1 crore pre-tax covered project generates illustrative GST of ₹8.9 lakh. If only ₹4 lakh can be utilised each quarter because of output-tax capacity, the economic timing differs from immediate recovery. Interest on that working-capital bridge belongs in the project model.

Do not confuse ITC with depreciation. Recoverable GST can change accounting cost and tax basis. Assess capitalisation, useful life and tax depreciation separately with advisers.

What should an audit-ready GST file contain?

Before issuing the purchase order, assemble:

1. signed scope matrix and responsibility split;
2. supplier’s HSN/SAC and rate rationale for every line;
3. note explaining whether the notified 70:30 mechanism applies;
4. place-of-supply and invoicing analysis for the project state;
5. drawings and technical evidence on movability and attachment;
6. proof that electricity supports taxable business operations;
7. input-service-distributor or cross-charge analysis for multi-GSTIN groups;
8. invoice, e-invoice, e-way bill, receipt and payment controls;
9. return reconciliation and credit-utilisation forecast;
10. written tax opinion for Section 17(5) exposure.

Confirm current notifications and circulars on the invoice date. Advance rulings are generally applicant- and jurisdiction-specific; court decisions require review of facts and appellate status.

FAQ

Is 8.9% a notified solar EPC rate?

It is the blended result of applying the current 5% rate to the deemed 70% goods portion and 18% to the deemed 30% service portion in a covered supply. The legal mechanism is the notified valuation split; applicability is transaction-specific.

Can an EPC contractor charge 18% on some BoS items?

Potentially. Independently supplied structures or other components can have their own classification and rate. Review whether supplies are independent or fall within the notified project arrangement.

Does capitalising solar equipment block ITC?

Capitalisation alone does not answer Section 17(5). The nature of the supply, construction, plant-and-machinery exclusion, attachment and business use require analysis.

Can a tax invoice guarantee ITC?

No. Invoice possession is only one condition. Receipt, reporting, supplier compliance, payment, return filing, business use and blocked-credit rules also matter.

Should GST be excluded from project payback?

Only to the extent eligible credit is supportable and usable on a realistic timeline. Otherwise include unrecoverable GST and financing delay in the investment case.

Sources

• CBIC Notification 8/2021-Central Tax (Rate)—historical 12% entry
• CBIC Circular 163/19/2021-GST
• GST Council: 56th Meeting recommendations reducing renewable-energy devices to 5%
• GST Council: September 2025 rate-change FAQ
• Notification 9/2025-Central Tax (Rate), effective 22 September 2025

This is general educational material, not tax, accounting or legal advice. Obtain advice on the live contracts, invoices and law applicable to your GST registrations.