GST Input Credit

What GST input credit is

GST input credit (also called Input Tax Credit or ITC) is the mechanism under the Goods and Services Tax Act 2017 that allows a business to offset the GST it paid on inputs (purchases of goods and services) against the GST it collected on outputs (sales of goods and services). The net GST liability paid to the government is the output GST minus the input credit.

For solar, this means a business buying solar equipment can recover the GST it paid (typically 12% on modules and 18% on inverters and BoS) by claiming it as input credit against its output GST liability. The effective cost of the solar system to the business is the GST-exclusive amount, even though the supplier charges GST on the invoice.

The mechanism is one of the main benefits of GST registration for commercial and industrial solar buyers. For a 100 kW commercial solar plant costing Rs 55 lakh, the GST component is approximately Rs 7 lakh to Rs 9 lakh. This is fully recoverable as input credit for a GST-registered business with sufficient output GST liability.

GST rates on solar in 2026

These rates are subject to change through GST Council decisions. The rate on solar modules was raised from 5% to 12% effective October 2021, which significantly affected project economics. Industry has lobbied for a return to the lower rate, but the 12% rate remains in effect through 2026.

How GST input credit works for solar buyers

For a commercial buyer of a 100 kW rooftop solar system:

System cost (GST-exclusive): Rs 47 lakh.

GST on modules at 12% (50% of system value): Rs 2.82 lakh.

GST on inverters and BoS at 18% (50% of system value): Rs 4.23 lakh.

Total GST: Rs 7.05 lakh.

System cost including GST: Rs 54.05 lakh.

The business pays Rs 54.05 lakh to the supplier. The Rs 7.05 lakh GST appears in the business’s GSTR-2A as input credit. The business uses this credit to reduce its GST liability on its own output (sales of products or services).

Net cost of solar to the business: Rs 47 lakh (GST-exclusive).

For a business that has sufficient output GST liability (most large businesses do), the credit is fully utilised within months. The cash flow benefit is delayed by GST reconciliation cycles but is fully recovered.

GST input credit conditions

Input credit is available subject to specific conditions:

The buyer must be GST-registered. Residential consumers and small businesses below the GST threshold cannot claim input credit.

The asset must be used for business purposes generating output GST. A solar plant generating electricity for self-consumption typically qualifies if the business has output GST liability.

The supplier must have a valid GST registration and have filed the relevant GSTR returns. Mismatches block the buyer’s input credit claim.

The buyer must possess a valid tax invoice and have made the payment (with some grace period).

The asset must not be classified as “non-creditable input” under specific GST exclusions.

GST and solar electricity sales

Electricity is currently exempt from GST. Solar generators selling power to DISCOMs through PPAs do not charge GST on the electricity component. The same applies to surplus solar exported under net metering, which is settled as bill credit, not as a taxable sale.

This creates an asymmetry. The solar developer pays GST on equipment but does not collect GST on electricity output. If the developer has no other taxable output, the input credit accumulates without utilisation.

To address this, developers typically:

Sell related services (O&M, monitoring) that attract GST, generating output GST liability that can absorb the credit.

Pursue refund of unused input credit under GST refund provisions for inverted duty structure or zero-rated supplies.

Structure the business to include other GST-taxable activities.

For C&I solar buyers using the plant for self-consumption, the GST burden is essentially the GST on the solar plant CAPEX, recoverable through the buyer’s normal business GST output.

GST on solar EPC contracts

Solar EPC contracts typically involve a mix of goods (modules, inverters, BoS) and services (installation, design). The GST treatment depends on how the contract is structured.

Composite supply: When the EPC contract is structured as a single contract for a “solar power generating system”, the GST treatment may follow the principal supply rate. The applicable rate depends on whether the system qualifies as plant and machinery (12% or 18%) or specific clarifications issued by the GST Council.

Works contract: When the contract is explicitly a works contract for solar EPC, the GST rate is 18% on the entire contract value.

Separate goods and services: Some contracts split the GST treatment, charging 12% on modules and 18% on other items and services.

The choice of structure affects total GST outflow. EPC contractors and buyers often consult GST advisors to optimise.

GST input credit and Accelerated Depreciation

GST input credit and AD are separate provisions under separate Acts.

GST input credit: Reduces GST liability. Applies to GST paid on solar equipment.

AD: Reduces income tax liability. Applies to the GST-exclusive cost basis of the asset (Rs 47 lakh in our example, not Rs 54.05 lakh).

Both are claimable by an eligible business. AD does not reduce the input credit, and input credit does not reduce AD eligibility. The two stack to provide significant total tax savings.

Recent GST rate developments

The GST rate on solar modules was raised from 5% to 12% effective October 2021, intended to support domestic manufacturing through differential rates between imports (taxed at higher Basic Customs Duty) and domestic supply. The rate increase added significant cost to solar projects.

Industry continues to lobby for the rate to be reduced back to 5%. Discussions at the GST Council have not resulted in a change as of 2026, but the matter remains under review.

For now, project planners should use the current 12% rate for modules and 18% for other equipment in their financial models.

Common mistakes with GST input credit

Assuming residential solar buyers can claim input credit. GST registration is required.

Forgetting that electricity sales are GST-exempt. Solar generators may have accumulated input credit without offsetting output.

Mixing GST input credit with AD claims as if they were on the same cost basis. AD applies to GST-exclusive cost.

Skipping vendor GST compliance verification. If the vendor has not filed GSTR returns, the buyer’s credit claim may be blocked.

Not optimising EPC contract structure. The GST treatment varies significantly with structure.

Best practices

For GST-registered buyers, ensure suppliers are GST-compliant and provide valid tax invoices.

Engage GST consultants for EPC contract structuring to optimise input credit utilisation.

Track input credit claims in GSTR-2A and GSTR-3B reconciliation.

For solar developers with low output GST, plan refund applications under inverted duty or zero-rated supply provisions.

For C&I buyers, model the project on GST-exclusive cost basis since input credit is recoverable.

For residential buyers, factor in the full GST as part of project cost since input credit is not available.

Standards and references

GST is governed by the Goods and Services Tax Act 2017 and corresponding state GST Acts. The GST Council issues rate notifications and clarifications. Input credit provisions are under Section 16 of the CGST Act. The CBIC (Central Board of Indirect Taxes and Customs) issues circulars on specific issues.

Related glossary terms

• Accelerated Depreciation
• MAT Credit
• CAPEX Model
• OPEX Model
• Power Purchase Agreement
• TCS on Solar
• TDS on Solar

Key takeaways

GST input credit allows GST-registered businesses to offset the GST paid on solar equipment and services against their output GST liability, effectively reducing the net cost of the solar system by 12% to 15%. The GST rate on solar modules is 12% (raised from 5% in October 2021), and on inverters and BoS is 18%. Electricity sales are exempt from GST, creating accumulation of input credit for developers without other taxable output. Combined with Accelerated Depreciation, GST input credit makes commercial solar significantly cheaper for taxable businesses than the sticker price suggests.