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

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.