GST Input Tax Credit Blocked for Remote Solar Power Plants
Businesses cannot claim GST input tax credit on solar plants if electricity is fed into the grid for credit adjustments.
- Ruling
- ORDER NO. 02/2026-27 DATED 20.05.2026
- Dated
- 20 May 2026
- Authority
- Appellate Authority for Advance Ruling
This page was written by Patron Accounting’s AI from the official release and reviewed before publishing. It explains the document in plain language. It is not the document itself. Where this page and the original differ, the original governs.
The short version
- The company asked if they could claim GST credit for a solar plant.
- The solar plant is at a different location than the steel factory.
- Electricity fed into the grid is treated as an exempt supply.
- Input tax credit is blocked because the output is an exempt supply.
In short
The company asked the Appellate Authority for Advance Ruling if they could claim input tax credit on the GST paid for building a solar power plant. They argued that because the electricity generated is used to power their steel factory, it should count as captive consumption. However, the authority decided that because the electricity is sent to the grid first, it is treated as a supply of exempt goods, which blocks the ability to claim credit for the taxes paid on the plant's construction.
What has changed
How it worked before
Many businesses assumed that generating power for their own use, even if routed through the grid, qualified as captive consumption and allowed them to claim input tax credit on the infrastructure costs.
What has changed
The authority ruled that feeding electricity into the grid constitutes a supply. Since electricity is an exempt supply under GST, the law prohibits claiming input tax credit on the goods and services used to create that supply. This means businesses cannot recover the GST paid on solar equipment if the power is not consumed directly at the site of generation.
Who this affects
Manufacturing businesses that set up solar power plants at remote locations and use grid-based energy credit systems to power their factories.
An example
A textile mill builds a solar plant five kilometers away from its factory. They feed the power into the state grid and receive credits to offset their factory's electricity bill. Based on this ruling, the mill would likely be denied input tax credit on the solar panels and installation services because the power is not consumed at the site of generation.
What you should do
If you are in a similar situation, you should review your power arrangement with your tax advisor. Remember that an advance ruling only binds the company that asked and its specific tax office; it is not a universal law that applies to your business automatically.
If you do nothing
If you claim input tax credit based on the assumption that this ruling does not apply to you, your local tax officer may issue a notice to recover the credit with interest and penalties. Relying on a misunderstanding of how exempt supplies affect your credit eligibility can lead to significant financial liabilities during an audit.
The terms explained
- Input Tax Credit
- The tax a business pays on its purchases that it can use to reduce the tax it owes on its own sales.
- Captive Consumption
- Using goods or services produced by your own business for your own further production processes rather than selling them to others.
- Exempt Supply
- Goods or services on which no GST is charged, meaning you generally cannot claim credit for the taxes paid to produce them.
The ruling in detail
Appellate Authority for Advance Ruling
M/s SBF Ispat Private Limited
ORDER NO. 02/2026-27 DATED 20.05.2026 · Rajasthan
Questions before the authority
- Whether, the applicant is eligible to avail input tax credit of GST paid on inputs/capital goods or input services used in Design, Engineering, Installation of 20.5 MW of the Solar Power Plant as per the Rajasthan Integrated Clean Energy Policy, 2024 (RICEP) standards, wherein, the generation of electricity from such solar plant is used for captive consumption;
- Whether the applicant is eligible to take input Tax credit as 'inputs/capital goods' or 'input services' of the items enlisted in "Annexure-B" of this application in terms of Section 16 and 17 of the CGST/RGST/IGST Act; and
- Whether the capital goods and inputs used in setting up/erection/commissioning/installation of the solar power plant constitute "Plant and Machinery" under the ambit of Section 17(5) of the CGST/RGST Act, 2017 and further as the said power plant is used in the manufacture of steel, whether, the same is used or intended to be used in the course or furtherance of the business of manufacturing Steel and hence, not blocked input tax credit under section 17(5) of the CGST/RGST/ IGST Act?
Facts
The appellant is a manufacturer of steel products and is setting up a 20.5 MW solar power plant at a separate location within Rajasthan, declared as an additional place of business. The electricity generated is transferred to the grid of RVPN/DISCOM, and the appellant receives credits for this energy, which are adjusted against the electricity consumed at their factory. The appellant contends this is captive consumption for the furtherance of their business.
Ruling
| Question | What the authority ruled |
|---|---|
| Eligibility for ITC on solar power plant inputs/capital goods | Not eligible The solar power plant is used for generation of electricity, which is an exempt supply. |
| Eligibility for ITC on items in Annexure-B | Not eligible Credit is restricted under Section 17(2) read with Section 17(5) of the CGST/RGST Act, 2017. |
| Classification as Plant and Machinery and business use | Not eligible The goods do not qualify as plant and machinery used for making taxable outward supplies; credit is blocked under Section 17(5)(c) and 17(5)(d). |
The Appellate Authority upheld the original ruling, denying the appellant's eligibility to claim input tax credit on goods and services used for the solar power plant. It concluded that the transfer of electricity to the grid constitutes a supply, and since the supply of electricity is exempt, the input tax credit is blocked. The authority rejected the argument that this arrangement qualifies as captive consumption.
Reasoning
The authority determined that feeding electricity into the DISCOM grid constitutes a **taxable supply** under Section 2(83) of the CGST Act, as the credits received from DISCOM represent consideration. Because the output (electricity) is an **exempt supply** under Notification No. 02/2017-CT(Rate), the input tax credit is blocked under Section 17(2) and Section 17(5) of the CGST Act. The authority further held that the 'captive' nature of the power is determined by the location of generation, not the location of use, and therefore the consumption cannot be treated as captive.
Provisions relied on
- Section 2(31) of the CGST Act, 2017
- Section 2(83) of the CGST Act, 2017
- Section 16 of the CGST Act, 2017
- Section 17(2) of the CGST Act, 2017
- Section 17(5) of the CGST Act, 2017
- Rule 42 of the CGST Rules, 2017
- Rule 43 of the CGST Rules, 2017
- Notification No. 02/2017-CT(Rate) dated 28-06-2017
For the practitioner
This ruling clarifies that for businesses generating electricity at a remote location and feeding it into the grid for credit adjustments, the activity is treated as a **taxable supply of exempt goods**, thereby blocking ITC. It serves as a warning that 'same GSTIN' status does not automatically permit ITC if the electricity is not consumed at the place of generation. Practitioners should note that this order distinguishes itself from previous case laws by emphasizing the **bilateral nature of the grid-transfer arrangement**.
Source
This is a summary prepared from the published order, which is a scanned document. It is a reading aid and not the authority: where the two differ, the order governs. Verify every provision against the original before relying on it.
Original order: https://www.gstcouncil.gov.in/sites/default/files/2026-06/web_manager_2.pdf
Legibility of the scan, as read: high.
Prepared 11-10-2026.
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