GST ITC Allowed on Rooftop Solar for Captive Use: AAR Rajasthan – What It Means

The shift towards renewable energy is gathering pace across Indian industry, with rooftop solar installations now a familiar sight atop factories and warehouses. For CFOs and plant heads, the financial case for solar is compelling—but the real clincher is the ability to claim GST input tax credit (ITC) on the capital outlay. A recent ruling by the Rajasthan Authority for Advance Ruling (AAR) in the case of Pristine Industries has brought much-needed clarity to this area, confirming that ITC is indeed available on rooftop solar plants used for captive consumption, provided certain conditions are met.

Let’s break down what this means, how the law is interpreted, and what steps businesses must take to claim ITC confidently and compliantly.

Rooftop Solar for Captive Use: Why the GST ITC Question Matters

Rooftop solar is no longer just an environmental choice—it’s a strategic lever for cost control and energy security. For manufacturers and large commercial units, the GST paid on solar panels, inverters, transformers, and installation services can be substantial. If ITC is allowed, the effective project cost drops sharply, improving payback and internal rate of return. But the law around ITC on such capital assets—especially those fixed to buildings—has been a grey area, with confusion over what counts as “plant and machinery” and what gets blocked as “civil structure.”

The Rajasthan AAR Ruling in Pristine Industries: What Was Decided?

The Facts:
Pristine Industries, a manufacturer of PP/HDPE woven sacks, installed a rooftop solar plant (over 620 kW) on its factory for captive use. The plant was capitalised as “plant and machinery” in the books. The company sought an advance ruling on whether GST ITC could be claimed on the inputs, capital goods, and services used for setting up the plant.

The Key Question:
Does a rooftop solar plant, fixed to the building, qualify as “plant and machinery” (thus eligible for ITC), or is it an “immovable property” (thus blocked under Section 17(5) of the CGST Act)?

The AAR’s Holding:

• The rooftop solar plant, though immovable, qualifies as “plant and machinery” as per the explanation to Section 17(5) of the CGST Act.
• The restriction under Section 17(5)(d) (which blocks ITC on construction of immovable property other than plant and machinery) does not apply.
• ITC is allowed on inputs, capital goods, and input services used for setting up the plant, provided the plant is capitalised as “plant and machinery” and all other conditions under Section 16 and Rule 43 are met.
• The plant must be used for captive consumption in the business (i.e., manufacturing taxable goods).

Legal Interpretation: How Sections 16, 17(5), and the Plant & Machinery Explanation Interact

Section 16: The Gateway to ITC
Section 16 of the CGST Act is the starting point—it allows a registered person to claim ITC on goods or services used in the course or furtherance of business, subject to certain conditions (like possession of invoice, receipt of goods/services, tax paid to government, and proper return filing). For details on GST compliance, see our GST registration and filing services.

Section 17(5): The Blocking Provision
Section 17(5) lists situations where ITC is blocked, including:

• Works contract services for construction of immovable property (other than plant and machinery)
• Goods/services used for construction of immovable property (other than plant and machinery) on own account

The Crucial Explanation: What is ‘Plant and Machinery’?
The explanation to Section 17(5) defines “plant and machinery” as:

• Apparatus, equipment, and machinery fixed to earth by foundation or structural support, used for making outward supply of goods or services
• Includes such foundation and structural supports
• Excludes land, building, civil structures, telecom towers, and pipelines outside the factory

Why This Matters:
If your rooftop solar plant qualifies as “plant and machinery,” the ITC block under Section 17(5)(d) does not apply. The AAR confirmed that solar plants, even when fixed to the building, are “plant and machinery” (not civil structure), so ITC is allowed—subject to capitalisation and usage for business.

Rule 43: Apportionment for Capital Goods
If the solar plant is used for both taxable and exempt supplies, or for business and non-business purposes, Rule 43 requires proportionate ITC reversal. This means you must track usage and apportion credit accordingly.

Read more about ITC reversals and apportionment under GST.

Practical Guidance: Documentation, Evidence, and Conditions for Claiming ITC

1. Capitalisation Requirement

• The solar plant and all eligible components (panels, inverters, transformers, meters, wiring, structural supports) must be capitalised as “plant and machinery” in your fixed asset register. For a professional fixed asset audit service, visit fixed assets audit.
• Maintain clear records: contracts, work orders, invoices, and asset schedules showing capitalisation.

2. Evidence of Captive Consumption

• Keep electricity bills, grid agreements, and load flow data to prove that the power generated is used for your own manufacturing or business operations. See our finance services for assistance with financial documentation.
• If any power is exported to the grid or used for non-business purposes, maintain records to show the proportion and perform ITC apportionment as per Rule 43.

3. Eligible vs Excluded Components

• Eligible for ITC: Solar panels, inverters, transformers, meters, wiring, mounting structures (if purely functional)
• Not Eligible: Building, roof, or civil works unrelated to the functional support of the plant (e.g., new construction, unrelated repairs)

4. Apportionment and Ongoing Compliance

• If the plant is used for both taxable and exempt supplies, calculate ITC eligibility as per Rule 43 and maintain working papers for audit.
• Regularly reconcile usage and update documentation if the plant’s use changes.

Risk & Limitation Analysis: Where ITC Claims Can Go Wrong

AAR Rulings: Persuasive, Not Pan-India Binding

The Rajasthan AAR’s decision is binding only on the applicant (Pristine Industries) and the jurisdictional GST officer in Rajasthan. For businesses in other states, the ruling is persuasive but not conclusive. Other state authorities or appellate forums may take a different view, especially if facts differ or if the solar plant is used in a mixed manner (e.g., partial grid export). Businesses in Delhi and NCR can consult our Delhi Chartered Accountants team for tailored advice on GST matters.

Scenarios Where ITC May Be Challenged

• Net Metering and Third-Party Sale: If your solar plant is connected to the grid and you export surplus power (net metering), authorities may question whether the plant is used “in the course or furtherance of business.” If a portion of the power is sold to third parties or the grid, ITC must be apportioned, and robust evidence of captive consumption is essential.
• Mixed Use (Business + Non-Business/Exempt Supplies): If the plant supports both taxable and exempt activities, or is partly used for non-business purposes (e.g., canteen, guest house), ITC must be proportionately reversed under Rule 43.
• Insufficient Evidence: Claims can be denied if you cannot demonstrate that the plant is capitalised as “plant and machinery” or if usage records are incomplete.

Typical Disallowances

• Misclassified Civil Works: ITC is often disallowed when costs for civil structures (e.g., new roofs, unrelated building works) are bundled with eligible plant and machinery.
• Poor Documentation: Missing invoices, incomplete asset registers, or lack of usage logs can sink your claim.
• Retroactive Reversal: If the plant’s use changes (e.g., more power exported to grid), ITC may need to be reversed, sometimes with interest.

Read more about GST challenges and compliance from our blog post on GST practical guide: Input Tax Credit.

Action Steps & Best Practices for Manufacturers and Operators

1. Procurement & Contract Structuring

• Bifurcate Contracts: Ensure contracts and purchase orders clearly separate eligible plant and machinery (panels, inverters, supports) from excluded civil works (building, unrelated construction). Learn how our outsourcing services can help with contract management.
• Vendor Invoices: Insist on detailed invoices that map directly to eligible components. Avoid lump-sum billing that mixes eligible and ineligible items.

2. Internal Controls

• Asset Tagging: Tag and map each solar asset in your fixed asset register as “plant and machinery.”
• Usage Documentation: Maintain logbooks, electricity bills, and grid agreements to evidence captive consumption.
• Regular Reconciliation: Set up periodic ITC working and reconciliation processes, especially if plant usage changes.

3. Treatment of Civil Works & Structural Supports

• Isolate Functional Supports: Only claim ITC on foundations and supports that are integral to the solar plant’s operation. Exclude costs for general building or civil works.
• Document Each Cost Component: Keep a clear audit trail for every rupee claimed as ITC.

4. Safeguards for Non-Rajasthan Businesses

• Legal Opinion: If you’re outside Rajasthan, obtain a legal opinion before relying on the AAR’s interpretation. Disclose reliance and potential risks in board notes or financial statements. Our GST consultancy services can assist you with this.
• Prepare for Scrutiny: Have a fallback plan (e.g., voluntary reversal) in case of adverse assessment.

Ongoing Compliance: Apportionment, Reversal, and Monitoring

Rule 43: Apportionment and Reversal

• If the solar plant is used for both taxable and exempt supplies, or for business and non-business purposes, calculate eligible ITC as per Rule 43. Maintain detailed working papers and update them annually or when usage changes.
• If the plant’s use shifts (e.g., more power exported to grid, or used for exempt activities), reverse ITC proportionately and disclose in GST returns.

Compliance Calendar and Audit Readiness

• Schedule regular checks of ITC ledgers, asset registers, and usage logs.
• Retain all documentation (invoices, contracts, usage records) for at least six years, as required under GST law.
• Be ready to present evidence during GST audits or queries. Our GST audit services can help you prepare for this.

Handling Future Changes

• For upgrades, off-grid shifts, or sale of excess power, reassess ITC eligibility and apportionment.
• Update documentation and inform your GST consultant or auditor promptly.

Common Pitfalls and How to Avoid Them

• Misclassification: Don’t club civil works or building costs under “plant and machinery.” Only claim ITC on eligible components.
• Insufficient Documentation: Missing capitalisation entries, incomplete invoices, or lack of usage logs are red flags.
• Improper Apportionment: Failing to track mixed use or ignoring Rule 43 can lead to reversals and penalties.
• Reactive Compliance: Don’t wait for an audit to update records. Proactive, ongoing documentation is your best defence.

Practical Remediation Steps

• Conduct an internal audit of your solar plant ITC claim before filing returns. You can engage experts via our management audit services.
• Rectify any documentation gaps, and if in doubt, seek a second opinion from your GST advisor.

Final Thoughts: Strategic Significance and Recommendations

The Rajasthan AAR’s ruling is a significant win for businesses investing in rooftop solar for captive use. It clarifies that, when structured and documented correctly, GST ITC is available on such installations—sharply improving project viability. However, the onus is on CFOs and plant operators to ensure that every claim is future-proof: capitalise assets properly, maintain robust documentation, and monitor usage and compliance on an ongoing basis.

Key Takeaway:
Treat your rooftop solar ITC claim as you would any major capital investment—plan, document, and review at every stage. With the right controls and evidence, you can claim ITC confidently and withstand scrutiny, turning your solar investment into a true financial and operational asset.

If you have questions about your specific scenario, or need a compliance health check for your solar ITC claim, don’t hesitate to reach out to our Rajasthan Chartered Accountants or Delhi office for expert assistance. The sun is shining on compliant, audit-ready businesses—make sure you’re one of them.