What Is Composite Supply?

What is composite supply?

Composite supply is a GST concept defined under Section 2(30) of the CGST Act 2017. It refers to a supply made by a taxable person to a recipient comprising two or more taxable goods or services, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply. The entire composite supply is taxed at the rate applicable to the principal supply.

For solar projects, composite supply classification is especially relevant. A typical solar EPC contract bundles equipment (modules, inverters, mounting, BOS) with services (engineering, installation, commissioning). Such bundling is generally treated as a composite supply, with the equipment being the principal supply for GST classification purposes.

The opposite of composite supply is mixed supply, where two or more independent goods or services are artificially bundled for a single price. Mixed supplies are taxed at the highest GST rate among the items. Solar EPC contracts are generally not mixed supplies because the equipment and installation are naturally bundled.

Why composite supply matters for solar

Composite supply classification determines GST rate, which directly affects project cost, customer pricing, and ITC eligibility. A solar contract correctly classified as composite supply with equipment as principal is taxed lower than if treated as pure service supply at the standard service rate.

For solar EPCs, composite supply structure protects margin. For customers, it lowers landed cost. For tax administration, correct classification protects against later audit disputes. CBIC has clarified through circulars that grid-connected solar power generating systems supplied as composite supply with installation follow the 70/30 split rule.

The 70/30 split means 70 percent of the contract value is treated as goods supply (taxed at the applicable goods rate, currently 12 percent for solar equipment under HSN 8541) and 30 percent as services supply (taxed at 18 percent under SAC for solar installation services). The effective blended rate is approximately 13.8 percent.

Example: GST on a 100 kWp commercial solar project

Consider a 100 kWp solar plant supplied by an EPC for a commercial customer at INR 50 lakh ex-tax. Under composite supply with 70/30 split:

• Goods component: INR 35 lakh at 12 percent GST = INR 4.2 lakh tax
• Services component: INR 15 lakh at 18 percent GST = INR 2.7 lakh tax
• Total GST: INR 6.9 lakh, effective rate 13.8 percent
• Total customer cost: INR 56.9 lakh inclusive

The commercial customer claims ITC of INR 6.9 lakh against output tax liability. Net GST cost is zero if the customer has sufficient output tax. For a residential customer without business purpose, no ITC; the INR 6.9 lakh is a final cost.

Benefits of correct composite supply classification

• Lower effective GST. 13.8 percent versus 18 percent pure service.
• Customer cost reduction. Margin transferred to customer or retained.
• Audit defensibility. Clear classification with documentation.
• ITC clarity. Standard ITC rules apply.
• Tender competitiveness. Lower GST means lower total bid.
• Compliance. Aligned with CBIC guidance.
• Documentation discipline. Forces contract structure clarity.

Limitations and challenges

Classification uncertainty. Edge cases (off-grid, hybrid, BESS-integrated) test the 70/30 framework.

Rate revisions. GST Council periodically revises rates; what is composite today may be classified differently tomorrow.

Audit risk. DGGI and state GST audits challenge classification when substance does not support.

Contract structure dependency. Classification depends on actual contract terms; poorly drafted contracts undermine composite treatment.

Customer awareness gaps. Customers sometimes expect pure goods or pure service treatment.

Composite supply in Indian solar practice

Scenario	Treatment
Grid-connected solar plant plus installation	Composite supply, 70/30 split, ~13.8 percent
Pure equipment sale (no installation)	Goods supply, 12 percent on equipment HSN
Pure installation service (no equipment)	Service supply, 18 percent SAC
Solar plus battery storage integrated supply	Composite supply, classification depends on principal
O&M and AMC post-handover	Independent service, 18 percent
Carport, BIPV, off-grid hybrid	Case-by-case classification

Quick facts

Legal basis	CGST Act Section 2(30)
Tax rate	Principal supply rate (~13.8 percent for solar)
Solar treatment	70/30 split per CBIC circular
Opposite	Mixed supply (artificially bundled)
ITC	Standard rules apply
Authority	CBIC, GST Council, AAR
Documentation	Tax invoice, HSN/SAC, contract, BOQ

Common mistakes about composite supply

1. Treating solar EPC as pure service. Higher tax.
2. Treating as pure goods. Misclassifies services component.
3. Skipping 70/30 split documentation. Audit risk.
4. No tax invoice clarity. Composite mention required.
5. Treating O&M as composite with original. Wrong.
6. Wrong HSN code on principal. Wrong rate.
7. Ignoring AAR rulings in own state. Different conclusions.
8. No tax counsel review for complex contracts. Audit exposure.

Key takeaways

• Composite supply is a GST concept for naturally bundled supplies with a principal.
• Whole supply taxed at the principal's rate.
• Solar EPC contracts are generally composite supplies.
• CBIC 70/30 split: 70 percent goods, 30 percent services.
• Effective rate for grid-connected solar approximately 13.8 percent.
• ITC applies for commercial / industrial customers under standard rules.
• Quality EPCs document classification and contract structure carefully.

Frequently Asked Questions

Sources

• CGST Act 2017, Section 2(30). Definition of composite supply. cbic.gov.in
• CBIC circulars on solar power generating systems. 70/30 split clarification.
• GST Council notifications. Applicable rates for solar goods and services.
• Advance Rulings on solar EPC contracts. State AAR decisions.
• ICAI publications. GST guidance for renewable energy.
• CBIC FAQs on composite and mixed supply.
• MNRE guidance on solar project taxation. mnre.gov.in