ITC on Rooftop Solar Plants Used for Captive Consumption (GST Explained)

Input Tax Credit (ITC) is available on rooftop solar plants used for captive consumption when structured correctly. Recent Advance Ruling Authority (AAR) and appellate decisions have brought long-awaited clarity: rooftop solar systems installed for business use are treated as “plant and machinery,” not blocked immovable property, making ITC on goods and services admissible under GST.

For businesses investing in rooftop solar to reduce power costs and meet ESG goals, this interpretation can significantly lower the net project cost in INR, sometimes by several crores.

This guide explains when ITC is allowed, why rooftop solar qualifies as plant and machinery, key judicial precedents, and how CFOs can safeguard credit eligibility amid evolving GST compliance changes.

Key Takeaways

• GST ITC is allowed on rooftop solar plants used for captive consumption when the system is capitalised as plant and machinery, and electricity is used for taxable business activities.
• Rooftop solar is not treated as blocked immovable property under Section 17(5) of the CGST Act, as clarified by multiple AAR and appellate rulings.
• ITC is available on the entire project cost, including solar modules, inverters, mounting structures, cabling, and EPC services—subject to standard GST conditions.
• ITC is not allowed if electricity is sold as an exempt supply (such as power exported to the grid), and proportionate reversal applies where captive and exempt use is mixed.

GST Framework: How ITC Works for Rooftop Solar

Under the GST law, a registered person may claim ITC on tax paid on inputs, input services, and capital goods used in the course or furtherance of business.

Rooftop solar plants installed on factories, warehouses, malls, IT parks, or commercial buildings directly support business operations by:

• Reducing electricity expenditure
• Improving energy reliability
• Supporting taxable outward supplies

When the system is used for captive consumption, the GST paid on procurement and installation is eligible for credit, provided the statutory conditions are satisfied.

The Historical Roadblock: Section 17(5) and “Immovable Property”

The main area of dispute has been Section 17(5)(d) of the CGST Act, which disallows ITC for goods and services used in the construction of immovable property (other than plant and machinery) on one’s own account.

Tax authorities frequently argued that:

• Rooftop solar plants are fixed to buildings
• They therefore become part of immovable property
• ITC should be blocked

This approach resulted in frequent disputes and audit objections. A detailed list of such restricted credits is explained here.

Why Rooftop Solar Qualifies as “Plant and Machinery”

The turning point lies in the statutory explanation to Section 17(5).

Legal Definition That Matters

“Plant and machinery” includes:

• Apparatus
• Equipment
• Machinery fixed to earth by foundation or structural support

It excludes only land, buildings, and civil structures.

What Authorities Have Consistently Held

AARs in Rajasthan, Tamil Nadu, Kerala, and Gujarat have ruled that rooftop solar plants:

• Are functional power-generating systems
• Consists of integrated components (modules, inverters, transformers, cables, mounting structures)
• Are not merely extensions of the building

Even though mounted on rooftops, the system remains an independent plant and machinery.

Once capitalised in the books, ITC is not subject to Section 17(5)(d).

Captive Consumption: The Non-Negotiable Condition

While classification as plant and machinery is critical, captive consumption of electricity is the deciding factor.

When Is ITC Allowed?

ITC is permitted where:

• Electricity is used internally for manufacturing or business operations
• Power supports taxable outputs (including zero-rated supplies)

The Kerala AAR allowed ITC for a mall rooftop plant because electricity was used for taxable common-area maintenance services, which were billed with GST.

When Is ITC Denied?

ITC is not allowed where:

• Electricity is supplied to the grid or DISCOM
• The outward supply of electricity is exempt

In such cases, Sections 17(2) and 17(3) apply, restricting credit irrespective of plant classification.

What ITC Is Typically Allowed On?

For rooftop solar plants used entirely for captive consumption, ITC generally covers the entire project value, including:

• Solar PV modules, inverters, transformers, junction boxes, cables, and mounting structures
• EPC services such as design, engineering, erection, testing, and commissioning
• Electrical and mechanical works up to the point of captive load connection

Authorities have confirmed that inputs, capital goods, and input services are all eligible, subject to Section 16 conditions.

For large installations, this can mean substantial INR savings, materially improving project economics.

Compliance Conditions to Protect ITC

To ensure ITC withstands audit scrutiny, businesses should ensure:

1. Correct GST Registration and Business Use

The recipient must have a valid GST registration and use the plant for business purposes.

2. Proper Capitalisation

The system must be capitalised as “plant and machinery”, not as a building or civil structure.

3. Taxable Output Linkage

Electricity must be used for taxable or zero-rated supplies. If partly used for exempt supplies, proportionate ITC reversal is mandatory.

Documentation That Authorities Expect

Strong documentation is critical. Businesses should maintain:

• EPC contracts and work orders
• Tax invoices with correct GST rates
• Layout drawings and capacity details
• Metering data showing captive consumption
• Proof of payment within 180 days

Weak documentation and the absence of a legal position are often the reasons ITC is challenged.

Key Judicial and AAR Precedents Supporting ITC

Some of the most cited rulings include:

• Pristine Industries Ltd (Rajasthan AAR) – ITC allowed on a 620 kW rooftop solar plant used in manufacturing
• Tamil Nadu AAR (Edible Oil Manufacturer) – ITC allowed on a 265 kW captive rooftop system
• Kerala AAR (Mall Rooftop Systems) – ITC permitted where electricity-supported taxable common area services

In contrast, rulings on the supply of power to state utilities (such as TANGEDCO) have denied ITC because the output is exempt.

Practical Structuring Tips for CFOs and Tax Heads

To maximise ITC benefits in INR terms, finance teams should:

• Structure EPC contracts with clear segregation of goods and services
• Ensure GST rates are correctly applied and reflected in invoices
• Align accounting treatment with GST position
• Reconcile solar-related ITC with GSTR-2B regularly
• Implement asset tagging and consumption tracking

In many cases, post-ITC project costs drop sharply, reducing payback periods from 5–6 years to 3–4 years. Many organisations involve a virtual CFO to manage such cross-functional compliance.

Common Risks and How to Mitigate Them

Audit Risk: “Immovable Property” Argument

Mitigation: Maintain copies of relevant AAR rulings and professional opinions, aligning facts with accepted precedents.

Usage Change Risk

If excess power is later exported to the grid:

• Proportionate ITC reversal may apply
• Periodic review of consumption mix is essential

Proactive reversals reduce exposure to interest and penalties in INR.

Conclusion: The Strategic GST Advantage of Rooftop Solar

Rooftop solar plants used for captive consumption now receive strong, consistent support under the GST ITC.

The three pillars of a defensible position are:

1. Plant and machinery classification
2. Captive use for taxable business activities
3. Robust documentation and accounting alignment

For manufacturers, malls, logistics parks, and energy-intensive businesses, this clarity transforms GST on rooftop solar from a sunk cost into a strategic tax credit, strengthening both financial returns and sustainability outcomes.

When structured correctly, rooftop solar is no longer just an energy decision—it’s a GST-efficient capital investment.