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.

[YAGAY andSUN]

Aspect	Treatment
Nature of expense	Common input (electricity generation + REC issuance)
ITC entitlement	Allowed but proportionate under Rule 42/43
Credit reversal method	(Exempt turnover ÷ Total turnover) × Common credit
Turnover base	Includes electricity, REC, and other supplies under same GSTIN
Capital goods like windmills	Treated similarly, credit spread over 60 months

[YAGAY andSUN]

Practical Treatment for Your Client:

Based on Kumaran Oil Mill 2020 (10) TMI 808 - AUTHORITY FOR ADVANCE RULING, TAMILNADU AAR:

• Treat windmill maintenance and repair expenses as common input services/capital goods.
• Claim full ITC on them, but reverse that portion attributable to exempt (electricity) supply using Rule 42/43.
• Use total turnover (electricity + REC + any other supply under the same GSTIN) for calculation.
• Apply the standard formula:
  Reversal=(EF)×C2 
  Where E = exempt turnover (electricity), F = total turnover, C2 = common credit.

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?? Supporting References:

• AAR – M/s Kumaran Oil Mill 2020 (10) TMI 808 - AUTHORITY FOR ADVANCE RULING, TAMILNADU, TN/33/AAR/2020 (28-09-2020): Proportionate ITC allowed under Sec 17(2) and Rule 42/43.
• Rule 42, CGST Rules: Lays out method for attributing common ITC.

[YAGAY andSUN]

Key Takeaways from Kumaran Oil Mill - 2020 (10) TMI 808 - AUTHORITY FOR ADVANCE RULING, TAMILNADU AAR:

1. Eligibility under Sections 16 & 17

• Section 16 allows ITC where the input is used in the course of business and other conditions are met.
• Section 17(2) mandates proportional reversal when used partly for exempt and partly for taxable supplies. 

2. REC sale qualifies as taxable supply

• Electricity generation leads to issuing RECs, which are treated as an output taxable supply. 

3. Common input credit allocation via Rule 42/43

• Goods/services: Rule 42; capital goods: Rule 43. Both require computing a reversal amount:

The AAR confirmed this method applies here. 

4. Turnover base includes all business segments

• Turnover across all verticals under the same GSTIN—electricity, REC, windmill services—must be used in the denominator. 
• Capital goods treated similarly
  • Solar panels etc. are capital goods used for both exempt and taxable supplies; Rule 43 prescribes spreading the ITC over 60 months proportionately.

[YAGAY andSUN]

Your analysis is spot-on. The expenses related to windmills—repairs, maintenance, services, etc.—are indeed common inputs/input-services because they facilitate both:

• the generation of electricity (an exempt supply under GST), and

• the issuance/sale of Renewable Energy Certificates (RECs), which are taxable.

Accordingly, Rule 42 (for inputs/services) and Rule 43 (for capital goods) of the CGST Rules require proportionate attribution of Input Tax Credit (ITC), as held in the AAR of Kumaran Oil Mill - 2020 (10) TMI 808 - AUTHORITY FOR ADVANCE RULING, TAMILNADU (TN/33/AAR/2020 dated 28-09-2020).

[Ganeshan Kalyani]

Proportionate to REC you may take the credit.

[Sadanand Bulbule]

Refer Sl No.3 of CBIC Circular No. 34/8/2018-GST dated 01/03/2018. Renewable Energy Certificates [REC] are considered as intangible goods and attract 18% GST in terms of Notification No. 11/2017-CTR dated 28/06/2017.

Hence proportionate ITC can be uitlised to set off output tax payable on sale of RECs.

[Sadanand Bulbule]

 For academic benefit refer :

M/s. Aristo Bullion Pvt. Ltd. - 2022 (1) TMI 1056 - APPELLATE AUTHORITY FOR ADVANCE RULING, GUJARAT 

[Shilpi Jain]

Agree that proportionate credit should be available.

AI Summary

Proportionate ITC reversal: allocate common input credit between exempt electricity and taxable REC supplies under GST rules. Windmill repairs, maintenance and related services are common inputs facilitating exempt electricity and taxable REC sales; claim ITC but reverse the portion attributable to exempt supply by applying the standard proportionate allocation formula using exempt turnover over total turnover (including electricity, REC and other supplies under the same GSTIN). Capital goods are treated similarly with ITC spread over the prescribed amortisation period. REC sales are taxable and CBIC and AAR authority cited support proportionate ITC treatment under the rules for inputs and capital goods.