What Is GST?

What is GST?

GST, the Goods and Services Tax, is India's single indirect tax on the supply of goods and services. Introduced in July 2017 under the constitutional amendment that empowered it, GST replaced a fragmented earlier regime of central excise, service tax, value-added tax, central sales tax, octroi, and several smaller state and central levies. The administrative structure has the central government, the state governments, and the union territories all collecting their portion under a coordinated framework, with the GST Council acting as the policy-making body.

For solar businesses, GST is the operational tax that touches every invoice, every contract, every purchase order, and every monthly return. Solar modules, inverters, BOS, EPC services, and AMC contracts all attract GST at rates fixed by the GST Council. Since 22 September 2025, solar power-based devices and photovoltaic modules attract 5 percent GST (down from 12 percent). A separately billed installation service or AMC attracts 18 percent, and a complete EPC contract is taxed on the 70:30 rule (70 percent goods at 5 percent, 30 percent service at 18 percent, about 8.9 percent effective). Batteries, structures and cables sold separately are 18 percent.

Every business above the registration threshold (typically ₹40 lakh annual turnover for goods and ₹20 lakh for services in most states) must register, collect output GST on supplies, pay input GST on procurements, and reconcile the two by filing returns. The mechanism gives the government real-time tax collection and gives compliant businesses access to Input Tax Credit, which is the working-capital lever that makes GST workable rather than punitive.

Why GST matters for solar businesses

For solar EPCs, GST is both a cash-flow lever and a compliance burden, and the GST on solar systems in India guide shows why both sides matter. On the cash-flow side, ITC on input purchases (modules, inverters, BOS, freight, services) reduces the net GST outflow each month. A well-organised EPC with clean documentation and rapid invoice processing can run a meaningfully lighter working-capital footprint than a competitor that fumbles GST.

On the compliance side, monthly returns, e-invoicing requirements (above the turnover threshold), e-way bill generation for inter-state movement, and HSN coding on every invoice all add operational overhead. The cost of compliance is fixed; smaller EPCs feel it more than larger ones.

For customers, GST is part of the project cost. A residential PM Surya Ghar quote is "₹X plus GST". The GST adds to the upfront outlay. Residential customers cannot claim ITC because they are not GST-registered. Commercial customers can, subject to eligibility, which improves their effective project economics.

For policy, GST has been the lever through which the central government can incentivise or discourage solar deployment without amending other laws. Rate cuts and clarifications have been used at multiple points to signal sectoral support. Rate increases have been debated for revenue reasons but typically resisted on policy grounds.

How GST works in a solar project

1. Procurement. The EPC buys modules, inverters, BOS, and services. Each supplier issues a GST invoice with the applicable rate.
2. Input Tax Credit accrues. The GST paid on procurements is recorded as Input Tax Credit available to offset future output liability.
3. EPC executes the project. Installation work proceeds. Customer makes milestone payments.
4. Output invoice. The EPC raises a GST invoice on the customer. The invoice shows base value, applicable GST (IGST, or CGST + SGST), and total.
5. E-invoicing (above threshold). The invoice is generated through the e-invoicing portal with an Invoice Reference Number.
6. E-way bill (above threshold). For inter-state movement of equipment, an e-way bill is generated separately.
7. Return filing. The EPC files GSTR-1 (outward supplies), GSTR-3B (summary return), and reconciliation through GSTR-2B as available. Output liability minus ITC equals net GST payable.
8. Annual return. GSTR-9 (annual return) is filed at year-end.
9. Audit and reconciliation. Periodic audit and reconciliation ensure ITC claimed matches the supplier-side filings.

Real example: GST on a Lucknow PM Surya Ghar project

Customer. A homeowner in Lucknow installing a 3 kWp PM Surya Ghar system.

Contract. EPC quotes ₹1,75,000 base plus GST on the 70:30 rule for a complete solar system (70 percent goods at 5 percent, 30 percent service at 18 percent).

GST on output. Goods ₹1,22,500 at 5 percent = ₹6,125. Service ₹52,500 at 18 percent = ₹9,450. Total GST ₹15,575, which is 8.9 percent of the base. Total invoice: ₹1,90,575. (Before 22 September 2025 the same contract carried ₹21,000 GST and a ₹1,96,000 invoice.)

Customer pays. ₹1,90,575 to the EPC. The PM Surya Ghar central subsidy of ₹78,000 is separately credited to the customer's bank after commissioning.

EPC's input side. Modules cost ₹68,000 plus GST ₹3,400 at 5 percent. Inverter ₹22,000 plus GST ₹3,960, assuming the supplier bills a separately sold inverter at 18 percent (the GST treatment of solar inverters is not settled in the notification text, and some suppliers bill 5 percent). BOS, mounting, cables: ₹35,000 plus GST ₹6,300, assuming 18 percent. Input GST aggregate: about ₹13,660.

EPC's net GST liability. ₹15,575 output minus ₹13,660 ITC = ₹1,915 paid to government for this transaction. The remaining ₹13,660 has already flowed to government through the EPC's suppliers. Because the goods leg is now taxed at 5 percent while many inputs are at 18 percent, input credit can exceed output tax on some contracts, and GST Council FAQs note that a refund mechanism for inverted duty exists.

Customer's net outlay. ₹1,90,575 paid, less ₹78,000 subsidy received = ₹1,12,575 effective project cost. GST of ₹15,575 is a real cost the residential customer cannot recover (no ITC).

What GST achieves for the sector

• Single national tax. Replaces 17+ earlier indirect taxes.
• Input Tax Credit. Avoids cascading taxes; the EPC pays GST only on its value addition.
• Uniform documentation. Standardised invoice format and HSN/SAC codes.
• Inter-state trade simplification. One regime across all states reduces logistics friction.
• Formalisation. Drives smaller players into the formal economy with GST registration.
• Transparency. Real-time reconciliation through the GSTN portal.
• Policy lever. Rate adjustments allow targeted sectoral support.

Limitations and ongoing issues

Rate volatility. Solar rates have changed multiple times since 2017. Contract pricing must account for rate-change risk.

Composite supply complexity. EPC contracts often need detailed structuring to align with GST treatment.

ITC disputes. Eligibility of certain input credits has been subject to litigation and clarifications.

Compliance burden on smaller EPCs. Monthly returns, e-invoicing, and reconciliation overhead is significant for small teams.

Cash-flow timing. ITC accrues based on supplier-side filings; mismatches can delay credit availability.

Residential customer cannot recover GST. Unlike commercial customers with ITC eligibility, residential PM Surya Ghar buyers cannot recover the GST component.

State-level variance in audit practices. Even within a unified framework, state tax authority approaches vary.

GST and solar in India

Aspect	Status
Current GST rate on solar (typical)	5 percent on solar modules and solar power-based devices since 22 September 2025 (12 percent before); 18 percent on separately billed installation service and AMC; complete EPC contract about 8.9 percent effective under the 70:30 rule
Registration threshold	₹40 lakh aggregate annual turnover for goods, ₹20 lakh for services (most states)
E-invoicing threshold	₹5 crore aggregate annual turnover (lowering over time)
HSN required	On all invoices above prescribed turnover threshold
Return frequency	Monthly GSTR-1 and GSTR-3B; quarterly for QRMP-scheme businesses
Annual return	GSTR-9 (mandatory above threshold)
Inter-state movement	E-way bill required above prescribed value
Composite vs separate supply	Most EPC contracts treated as composite supplies

Quick facts

Full form	Goods and Services Tax
Introduced	1 July 2017
Governing body	GST Council (recommendatory body of central + state finance ministers)
Administered by	CBIC at central level, state tax departments at state level
Compliance portal	gst.gov.in (GSTN)
Solar-relevant rate	5 percent on solar modules and devices (since 22 September 2025); 18 percent on installation service; 8.9 percent effective on a complete EPC contract
ITC mechanism	Available subject to eligibility conditions
Compliance documents	Tax invoices, e-invoices, e-way bills, monthly returns, annual return

Common mistakes about GST for solar businesses

1. Quoting "₹X all-inclusive" without separating GST. Invoices must show base + GST separately for ITC eligibility.
2. Using wrong HSN codes. Mismatched HSN can trigger notices and ITC reversals.
3. Forgetting e-way bill for inter-state material movement. Standard penalty risk.
4. Missing reconciliation between GSTR-2B and books. Unreconciled credits can be reversed during audit.
5. Treating composite supply and separate supply interchangeably. The GST treatment can differ materially.
6. Assuming current rate is fixed. Rate revisions happen periodically; track GST Council notifications.
7. Skipping e-invoicing thresholds. Once turnover crosses the e-invoicing threshold, every B2B invoice must be on the portal.
8. Forgetting that residential customers cannot recover GST. The customer's effective project cost includes the GST.
9. Mixing up CGST + SGST and IGST. Intra-state vs inter-state determines which.
10. Ignoring state-specific nuances. Even under unified GST, state tax authorities have some procedural variation.

Key takeaways

• GST is India's unified indirect tax replacing earlier central and state indirect taxes.
• Solar modules and devices attract 5 percent GST since 22 September 2025 (12 percent before), installation services 18 percent, and a complete EPC contract about 8.9 percent under the 70:30 rule.
• Input Tax Credit reduces an EPC's effective GST outflow if documentation is clean.
• Residential customers cannot claim ITC; commercial customers can, subject to eligibility.
• E-invoicing and e-way bill requirements apply above turnover thresholds.
• HSN coding on invoices is mandatory above the prescribed threshold.
• Track GST Council notifications; solar rates have been revised multiple times since 2017.

Frequently Asked Questions

Sources

• Central Board of Indirect Taxes and Customs (CBIC). GST notifications, rates, and clarifications. cbic.gov.in
• GST Council meeting minutes and recommendations. Rate change history and clarifications.
• GSTN (Goods and Services Tax Network). E-invoicing portal and return filing infrastructure. gst.gov.in
• Ministry of Finance. Budget announcements affecting GST rates and structure.
• CBIC clarifications on solar. Sectoral notifications on rate applicability and composite supply treatment.
• Indian Chartered Accountancy guidance. ICAI publications on sector-specific GST treatment.
• State Tax Departments. SGST notifications and clarifications.