Township Electricity & ITC: A Supreme Court Ruling That Could Reshape Industrial GST Credits

The pending adjudication before the Supreme Court in Bharat Aluminium Company Limited vs State of Chhattisgarh has the potential to recalibrate how the GST framework treats employee-centric infrastructure and captive utilities. 

The Court’s decision to entertain the SLP and issue notice signals that the controversy raises substantial questions of statutory interpretation with sector-wide consequences.

Background of the Dispute

The litigation arises from a recurring tension under the GST regime: whether facilities created for employees particularly in geographically remote industrial projects are merely welfare measures, or whether they are functionally embedded in the commercial operations of the enterprise.

Bharat Aluminium Company Limited operates a Captive Power Plant (CPP) and supplies electricity not only for industrial production but also to an employees’ township. The tax authorities treated such supply to the township as an exempt outward supply disconnected from the core business activity, thereby triggering proportionate reversal of Input Tax Credit (ITC) under Rules 42 and 43 of the CGST Rules.

The controversy intensified after the insertion of Explanation 1(d) via Notification No. 14/2022–Central Tax, which specifically addresses treatment of certain supplies while computing ITC reversals. The dispute now centers on whether this amendment merely clarifies the existing legal position or introduces a new disqualification operative only prospectively.

Findings of the High Court

The High Court adopted a restrictive reading of the phrase “in the course or furtherance of business.” It concluded that electricity supplied to an employees’ township lacks the requisite nexus with taxable outward supplies and is therefore outside the protective scope of business expenditure under GST.

Two key legal conclusions emerged:

1. Non-business characterization - Employee township electricity was treated as a welfare or residential activity rather than a commercial input to the manufacturing process.
2. Prospective operation of the amendment- Explanation 1(d) to Rules 42 and 43 was held to be prospective, applicable only from 05 July 2022. The court declined to view the amendment as clarificatory. This interpretation effectively narrows the operational width of “business” despite the deliberately expansive statutory definition in Section 2(17) of the CGST Act.

Assessee’s Legal Position

The assessee’s challenge is built on structural features of GST law-

• The statutory definition of business expressly includes incidental and ancillary activities.
• Industrial townships in remote locations are not optional welfare add-ons; they are logistical infrastructure necessary for workforce retention and uninterrupted production.
• Denial of ITC undermines the GST objective of tax neutrality and seamless credit flow.

The 2022 amendment is argued to be declaratory — intended to remove ambiguity rather than create a new restriction. This framing pushes the Court to confront a deeper jurisprudential question: whether GST should adopt a functional economic test of business nexus or a narrow transactional test.

Issues Before the Supreme Court

The Supreme Court is effectively being asked to determine:

• The interpretive breadth of “business” under GST.
• Whether employee infrastructure that enables industrial continuity forms part of taxable economic activity.
• The doctrinal test for distinguishing clarificatory amendments from substantive ones
• The permissible scope of delegated rule-making in curtailing statutory credit entitlements.

The matter is listed for hearing on 23 April 2026, and interim relief has also been sought, indicating immediate financial stakes.

Industry Implications

The consequences of the ruling extend beyond electricity supply:

• ITC on employee housing, hospitals, transport, and township utilities
• Treatment of exempt or non-revenue internal consumption
• Reversal mechanics under Rules 42 and 43
• Certainty around retrospective tax exposure

Industries operating integrated industrial ecosystems mining, metals, energy, cement, and heavy manufacturing will be particularly affected.

If the High Court view is affirmed, it may institutionalize a restrictive doctrine that fragments the GST credit chain wherever employee welfare intersects with production infrastructure. Conversely, a broader interpretation could reinforce GST’s design principle of economic neutrality.

Concluding Observations

This case is not merely about electricity accounting; it is a test case on the philosophical boundaries of GST as a value-added tax. At stake is whether the system recognizes the modern industrial reality that employee ecosystems are inseparable from production economics.

A definitive ruling from the Supreme Court could either narrow or expand the operational meaning of business under GST, a precedent that will shape ITC jurisprudence for years to come.