The GST Council may discuss tweaking the tax structure for renewable energy engineering, procurement and construction (EPC) contracts at its October meeting, government sources told Moneycontrol.
The council may consider slashing the goods and services tax (GST) on the services component of these contracts to 5 percent from 18 percent, aligning it with that on renewable energy equipment.
An EPC contract is a model used for large-scale infrastructure and energy projects. Under the agreement, a single contractor is responsible for delivering a fully operational project to the owner from start to finish — handling everything from design and equipment sourcing to final construction.
At present, the effective GST rate for the contract is 8.9 percent. For renewable energy and other infrastructure projects, the taxation of EPC contracts is governed by a 70:30 formula.
While 70 percent of the contract value is treated as a supply of goods and taxed at 5 percent GST, the remaining 30 per cent is classified as a supply of services, which attracts an 18 percent rate.
“The effective tax rate is 8.9 percent, but the industry is seeking a flat rate of 5 percent, which is likely to be discussed in the next meeting,” one of the sources said.
‘Lower rate to minimise inverted duty structure’
While input goods and services carry effective tax of 8.9 percent, the final generation and supply of electricity is exempt from GST. Because electricity output does not attract GST, project developers cannot utilise their Input Tax Credits (ITC) against output liability.
“A lower rate of 5 percent would lead to lower ITC accumulation… and minimise the inverted duty impact,” the person quoted above said.
“This issue (refunds of ITC) has been highlighted by the industry. If the inputs are taxed at a higher rate than the output, that leads to an accumulation of input tax credit,” a second government source said.
“Glass and metal are currently taxed at 18 percent, while solar panels are taxed at 5 percent and EPC services at 18 percent. If you increase the duty or tax on the EPC component to correct the rate difference, there would again be an impact on the price of alternative energy.”
GST reduction in services component would improve cost predictability and support faster renewable energy deployment, industry stakeholders say.
An tax expert said “The GST reduction in renewable energy equipment was a meaningful positive for project economics. But we would welcome further simplification of the tax structure and greater clarity on EPC contracts to improve cost predictability and support faster renewable energy deployment.”
Before September 2025, the effective GST rate on EPC contracts was 13.8 percent.
“If the services component is also brought under the 5 percent GST rate, it would not only reduce the tax burden on renewable projects but also bring greater clarity to the treatment of EPC contracts and reduce the scope for disputes,” a senior industry executive said on condition of anonymity.
‘Flat 5% GST to resolve disputes’
According to sources, the 70:30 allocation often leads to tax litigation over whether the actual value of services (civil work, installation, engineering) exceeds 30 percent. A flat 5 percent rate would ease compliance for both developers and tax authorities, sources said.
“To prove authorities that services didn’t exceed 30 percent of the total contract value becomes taxing for industry. A flat rate of 5 percent will reduce the confusion,” the first person cited above said.
For instance, on April 29, the Andhra Pradesh High Court set aside an 18 percent GST demand raised against Tata Power Renewable Energies on the entire value of its solar power-generating-system supplies. The court rejected the tax department argument that the 70:30 mechanism did not apply because Tata Power had raised separate invoices for goods and services.
