ITC reversal on REC units sold

[Narayan Pujar]

One of our clients is engaged in the sale of electricity generated from windmills, which is exempt from GST. In the course of this activity, the client also earns revenue from the sale of Renewable Energy Certificates (REC units), which are taxable under GST.

A question arises regarding the treatment of Input Tax Credit (ITC) on expenses related to the windmills such as repairs and maintenance. Should such ITC be treated as being exclusively attributable to exempt supplies, or as common credit attributable to both exempt and taxable supplies?

In my view, these expenses should be treated as common input services, since the functioning of the windmills facilitates both the generation of electricity (exempt supply) and the issuance of RECs (taxable supply). Accordingly, proportionate credit should be allowed under Rule 42 of the CGST Rules. [Kindly refer to the AAR Tamil Nadu ruling in the case of Kumaran Oil Mill]

Would appreciate insights from experts, along with any supporting judgments, circulars, or departmental clarifications that may help shed further light on this issue.

AI Summary

Input Tax Credit on Windmill Repairs Must Be Apportioned Under CGST Rules 42 and 43 for Exempt and Taxable Supplies A client engaged in exempt electricity generation from windmills also sells taxable Renewable Energy Certificates (RECs). The issue concerns whether Input Tax Credit (ITC) on windmill-related expenses like repairs should be treated as exclusively for exempt supplies or as common credit for both exempt and taxable supplies. The consensus, supported by the Tamil Nadu Authority for Advance Ruling (AAR) in Kumaran Oil Mill, is that such expenses are common inputs. ITC should be claimed in full but proportionately reversed based on the ratio of exempt turnover to total turnover under Rules 42 and 43 of the CGST Rules. The total turnover includes electricity, REC sales, and other supplies under the same GSTIN. Capital goods ITC is similarly apportioned and spread over 60 months. This approach aligns with Sections 16 and 17 of the CGST Act and relevant circulars, allowing proportionate ITC utilization against output tax on REC sales.