Guide with Sections 16 & 17, Judicial Principles and Practical Insights (Part 1A)
By CA Surekha S. Ahuja
"A rooftop solar power plant may generate electricity, but under GST, it is the purpose for which that electricity is used—not the installation itself—that determines whether Input Tax Credit is available."
India's rapid transition towards renewable energy has led industrial units, business parks, warehouses, logistics parks, commercial complexes and shopping malls to invest heavily in rooftop solar power plants. Besides reducing electricity costs and promoting sustainability, these projects involve substantial GST on solar panels, inverters, mounting structures, transformers, cables, installation and commissioning services.
For many taxpayers, the GST paid on such projects may run into several lakhs or even crores of rupees. Naturally, the first question before approving the investment is:
Can the GST paid on the purchase and installation of a rooftop solar power plant be claimed as Input Tax Credit (ITC)?
The answer is Yes—but not merely because GST has been paid on the purchase of the solar plant.
Under the GST law, the availability of ITC is determined by how the solar power plant is used in the business and whether it has a direct and proximate nexus with taxable outward supplies. Thus, two taxpayers installing identical rooftop solar plants may arrive at completely different GST outcomes depending upon the manner in which the electricity generated is utilised. This distinction is central to the statutory framework and the authorities discussed in the source material.
This article examines situations where GST Input Tax Credit is generally available on rooftop solar power plants. Situations where ITC is restricted or denied due to exempt electricity supplies and Rule 43 reversals will be discussed separately in Part 2.
Key Takeaways
Before examining the legal provisions, the following principles deserve attention:
✔ ITC on rooftop solar power plants is not automatic.
✔ Section 16 of the CGST Act creates the entitlement to ITC, subject to fulfilment of statutory conditions.
✔ Section 17 determines whether that entitlement is restricted or blocked.
✔ Where solar power is consumed for common facilities supporting taxable renting or business activities, the legal position is generally favourable for ITC.
✔ Proper documentation, technical design and contractual arrangements are often as important as the statutory provisions themselves.
Why GST Planning Should Begin Before Installing the Solar Plant
A rooftop solar power project is no longer a routine capital expenditure. Depending upon the capacity of the plant, the investment may range from a few lakh rupees to several crores.
The GST component itself may therefore be substantial.
A wrong position on ITC can result in:
- Recovery of wrongly availed ITC.
- Interest liability.
- Penalty, wherever applicable.
- Increased project costs.
- Long-drawn GST litigation.
Professional Insight
Many taxpayers focus only on reducing electricity costs while evaluating a solar project. Equally important is evaluating the GST implications before the EPC contract is finalised. A properly structured project can significantly reduce future litigation and improve overall project economics.
Section 16 – The Foundation of Every ITC Claim
Every discussion on GST Input Tax Credit begins with Section 16 of the Central Goods and Services Tax Act, 2017.
In substance, Section 16 provides that every registered person is entitled to take credit of GST charged on goods or services used or intended to be used in the course or furtherance of business, subject to fulfilment of the prescribed conditions.
This provision establishes three important legal principles.
1. ITC Is a Statutory Entitlement
Input Tax Credit is not a discretionary concession granted by the tax department.
Once the statutory conditions prescribed under the GST law are fulfilled, Section 16 recognises the taxpayer's entitlement to claim ITC.
However, this entitlement is not absolute. It remains subject to the restrictions contained elsewhere in the Act, particularly Section 17.
Accordingly, every ITC analysis should follow a two-step approach:
Step 1: Determine whether Section 16 creates the entitlement.
Step 2: Examine whether Section 17 restricts or blocks that entitlement.
Ignoring either step often results in an incorrect legal conclusion.
2. Business Use Is the Governing Test
The GST law does not ask:
"Has the taxpayer purchased a rooftop solar power plant?"
Instead, it asks:
"Is the rooftop solar power plant being used in the course or furtherance of the taxpayer's business?"
The emphasis is therefore on business use, not merely on ownership of the asset.
3. Capital Goods Are Eligible for ITC
A rooftop solar power plant is ordinarily a capital asset. That fact, by itself, does not prevent the availment of ITC. The GST law permits ITC on capital goods, provided:
- the conditions of Section 16 are fulfilled; and
- no specific restriction under Section 17 applies.
Statutory Conditions for Availing ITC
Even where the solar power plant is otherwise eligible, the following conditions should be satisfied:
| Requirement | Practical Compliance |
|---|---|
| GST Registration | The recipient should be registered under GST. |
| Valid Tax Invoice | Invoice should comply with the GST law. |
| Receipt of Goods and Services | The solar power plant should be installed and received. |
| Tax Paid by Supplier | Subject to statutory compliance under the GST framework. |
| Return Filing | Relevant GST returns should be furnished. |
| Time Limit | ITC should be claimed within the prescribed statutory time limit. |
| Business Use | The plant should be used in the course or furtherance of business. |
Failure to comply with these statutory requirements may jeopardise the ITC claim even where the project is otherwise eligible.
The Most Important Question Under GST
Most taxpayers ask:
"Is ITC available on solar panels?"
From a legal perspective, that is not the correct question. The correct question is:
"For what purpose is the electricity generated by the rooftop solar power plant ultimately used?"
This distinction lies at the heart of the GST law. The same rooftop solar power plant may qualify for full ITC, proportionate ITC, or no ITC at all, depending upon the nature of the outward supplies that it supports.
When Does the Law Generally Support Full ITC?
The strongest case for ITC arises where:
- a landlord owns an industrial or commercial property;
- a rooftop solar power plant is installed on that property;
- the electricity generated is consumed exclusively for common facilities; and
- those common facilities form part of the taxpayer's taxable renting or maintenance services.
Typical examples include electricity used for:
- Common lighting.
- Lifts and elevators.
- CCTV systems.
- Security infrastructure.
- Fire-fighting systems.
- Water pumps.
- Common HVAC systems.
- Parking areas.
- Landscape lighting.
- Other common amenities maintained by the landlord.
In such circumstances, the rooftop solar power plant is not generating an independent outward supply of electricity. Instead, it functions as an input used for providing taxable renting and maintenance services. The uploaded material discusses this distinction as the basis for favourable ITC treatment.
Understanding the Relationship Between Sections 16 and 17
Many disputes arise because taxpayers read Section 16 in isolation. The correct approach is to read Sections 16 and 17 together.
Step 1: Section 16 asks whether the inward supply is used in the course or furtherance of business.
Step 2: Section 17 asks whether any part of that inward supply is used for making exempt supplies or for purposes specifically blocked by law.
Only after answering both questions can the availability of ITC be determined.
Why Section 17(2) May Not Restrict ITC in This Situation
Section 17(2) restricts ITC where goods or services are used partly for taxable supplies and partly for exempt supplies.
However, where:
- electricity generated by the rooftop solar plant is consumed solely for common facilities;
- no separate electricity is supplied to tenants from that generation; and
- the landlord raises GST on rent and common area maintenance charges,
there may be no separate exempt outward supply of electricity attributable to the rooftop solar power plant.
Accordingly, on these facts, the restriction contemplated by Section 17(2) may not arise. This legal reasoning is reflected in favourable rulings dealing with common-area consumption supporting taxable renting activities.
Professional View
During GST audits, the tax authorities often examine the actual flow of electricity, metering arrangements, CAM agreements and the commercial substance of the transaction. Proper documentation demonstrating that the solar power is used exclusively for common taxable facilities significantly strengthens the taxpayer's position.
