The friction between India’s green energy policies and the GST framework stems from a structural clash between industrial utility design and rigid tax code interpretations. While the government promotes renewable energy setup, the GST Department frequently denies Input Tax Credit (ITC) on capital goods (wind turbines, solar panels), consumables, and engineering/commissioning services. 

The Three Core GST Department Interpretations:

1. The “Exempt Supply” Trap (Section 17(2))

• The Department’s View: Electrical energy falls under Tariff Heading 2716 00 00 and is exempt from GST as pe the Notn.2/20217 -CT(Rate), Sl.No.104. Under Section 17(2) of the CGST Act, ITC must be restricted or blocked if inputs or capital goods are used to produce exempt goods.
• The Industry’s Défense: The green energy is captively consumed rather than sold. It serves as an essential raw material or utility for manufacturing taxable final products (e.g., textiles, steel, cement). The cost of this power is entirely embedded in the taxable output, meaning denying ITC results in tax cascading.

2. The “Immovable Property” Block (Section 17(5)(d))

• The Department’s View: Solar arrays and wind turbine foundations are fixed permanently to the earth, constituting immovable property. Section 17(5)(d) explicitly blocks ITC on goods or services used for constructing immovable property on one’s own account.

1. The Industry’s Défense: Windmills and solar panels qualify as “Plant and Machinery”, which is explicitly excepted from the immovable property restriction under the Explanation to Section 17(5). They are mechanical assets that can be dismantled and relocated as had held by Hon’ble Supreme Court (SC) in the case of Sirpur Paper Mills v.Collector of Central Excise, Hyderabad. Reaffirmed the rationl supra in the case of Triveni Engineering & Industries Ltd. v. Commissioner of Central Excise (2000) & Commissioner of Central Excise, Ahmedabad v. Solid and Correct Engineering (2010): Reaffirmed the Sirpur Paper Mills The Supreme Court held that asphalt/hot mix plants bolted temporarily to shallow foundations for a road project could be dismantled and moved, meaning they remained movable and excisable goods.

3. The “Geographical Separation” & Grid Friction

• The Department’s View: Because generation plants are located far from factories (often across different registration units or states), the department treats the injection of power into the Discom grid as a separate, distinct transaction rather than a continuous manufacturing process.
• The Industry’s Défense: Siting architecture is irrelevant under GST. If both locations operate under the same GSTIN / Company, it is a self-use activity in the course or furtherance of business.  Further Banking/Wheeling power via a third-party grid does not alter the fundamental character of self-consumption since no title or ownership of power is transferred to the Discom. Grid facilitate transmission of power and acts merely as a carrier, not a buyer.

4. Strategic Litigative & Défense Framework

Dispute Angle	Revenue Dept.’s Stance	Industry Strategic Défense	Key Jurisprudence / Grounding
Captive Linkage	Power is an exempt item all procurement of ITC is blocked	Power is a component of a taxable output. Its cost structure feeds directly into taxable product.	Sri Cheran Synthetics / Nexus of Cost Principle
Asset Classification	Solar / Wind setups are structural, immoveable civil property,	Assets as per Ind AS, are “Plant & Machinery” intended for technological production, exempt from 17(5)(d) blocks.	Section 17(5) Explanation – Relying on Safari Retreats principles.
Wheeling & Banking	Injection into gid is a barter or transfer of an exempt commodity	The DISCOM acts as a transit medium (bailee), not a buyer. Ownership of energy never transfers.	Wheeling & Banking Agreement

In connection with the above, the following are the key pronouncement of Advance Rulings (AAR & AAAR) from the different AAR / AAAR

 

i). Denying ITC (Distinct Premises / Grid Interactivity)

In Re SBF Ispat Private Limited (AAAR Rajasthan): The Appellate Authority upheld the denial of ITC on a 20.5 MW captive solar plant situated away from the factory. It ruled that transferring electricity to the DISCOM grid against energy credits qualifies as an outward supply. Since electricity attracts a nil tax rate, ITC on all setup and operational costs stands blocked under Section 17(2).

 

ii). Allowing ITC (Same Premises / True Rooftop Captive)

Conversely, when non-conventional energy infrastructure is installed on-site, the rulings change:

• In re M/s. Unique Welding Products P. Ltd. (AAR Gujarat) & Pristine Industries Ltd. (AAR Rajasthan): Rulings have affirmed that rooftop solar systems affixed directly to a factory roof for captive use qualify as “plant and machinery”. Because they are utilized directly on-site for business without an external commercial grid supply loop, they avoid the blocked credit traps of Section 17(5)(d) and Section 17(2).

• Principle: When non-conventional or captive power (including renewable co-generation like black liquor or solar) is consumed captively to manufacture taxable goods, ITC on the plant/machinery is allowed, subject only to a proportionate reversal under Rule 43 of the CGST Rules if a small portion is sent out as an exempt supply. 

iii) In ITC Limited vs. Telangana Electricity Regulatory Commission and related petitions (W.P. No. 20224 of 2004 / Agri Gold Projects principle), courts noted that in the absence of formal renewable or cogeneration certification from a competent authority, generation cannot be automatically classified as privileged renewable/captive energy for tariff and obligation offsets]

• Immovable Property & Civil Structure Exclusion (Section 17(5)(d)):
  • Principle: If the solar or non-conventional structure is deemed permanently fastened to civil foundation/building construction, ITC is legally blocked under Section 17(5)(d) of the CGST Act.
• Proportionate Reversal for Exempt Outward Supply:
  • Principle: If electricity generated from a non-conventional source is treated as an exempt outward supply (or fed into the grid without a taxable nexus), the department enforces mandatory ITC disallowance or proportionate reversal under Rules 42 and 43.

1. iv) In Kanishk Steel Industries Limited, the Hon’ble High Court of Madras (Ref: WP No. WP No. 21075 of 2026 & & WMP Nos.22802 & 22805 of 2026) held against the AAR, TN as follows:

“Para No: 3: On perusal of the materials placed on record, it appears prima facie that the generation of power from the solar power plant was for captive consumption. Whether the method outlined in paragraph 1 above amounts to supply of electricity to TANGEDCO is the question to be answered. Because a prima facie case is made out that it may not qualify as supply, there shall be an interim stay of the impugned order until the next hearing date”.

5.00: Call To Action (CTA):

1. Regulatory Clarity & Fiscal Incentives:

• Fiscal Incentives: Transitioning to alternative energy requires explicit indirect tax incentives rather than structural ambiguity.
• Regulatory Clarity: The Ministry of Finance and CBIC must issue formal Notifications and Circulars to institutionalize “Green Energy” promotion.

2.. Resolution of ITC Ambiguity and Mitigation of Litigation

• Divergent Rulings: Conflicting Advance Rulings (AAR/AAAR) have created severe ambiguity regarding ITC eligibility on Green Energy plants, machinery, and associated engineering services.
• Administrative Relief: The CBIC should issue an immediate directive to field formations to keep the issuance of Show Cause Notices (SCNs) in abeyance on this subject.
• Litigation Reduction: Proactive circulars will prevent unnecessary, protracted litigation and streamline departmental audits.

3. Impact on Capital Budgeting and Investor Confidence

• Cost Optimization: Absolute clarity on ITC eligibility allows global and domestic investors to exclude the GST component from asset cost calculations.
• Tariff Reduction: Eliminating stuck tax costs directly lowers the levelized cost of energy (LCOE), offsetting overall industrial power costs.

Ease of Doing Business: Definitive tax certainties will significantly accelerate capital deployment in the renewable energy sector.