ITC on power plant and raw material

[Vedant Mansingka]

Good Morning All. Just had 2 questions regarding ITC availability for 2 situations

Context - We produce paper and we have a co-gen captive power plant and our raw material is waste paper which consists of a certain percentage of out throws (mainly plastic).

Situation 1 - Claim is being made that the coal that we buy to produce electricity should not have ITC available as electricity is an exempt item. But from what we understand basis CBIC Circular 125/44/2019 that this is not the case. Any more circulars or rulings where this is mentioned explicitly would be helpful

Situation 2 - We buy waste paper as our raw material which has a certain percentage of out throws. This is then given to a certified end user according to MPCB norms. This is at no cost and where in we bear the cost of transport. The claim is that the ITC on the out throws part of the raw material be reversed. Please note plastic is not an exempt item and not our main finished good, just that due to only being able to give the material to certified end users which are very few - we get no consideration in monetary value.

[Sadanand Bulbule]

Refer AAR of West Bengal in the case of Jindal Stainless Ltd rendered in 2019. It is held that ITC on coal used in the power generation for captive consumption in the manufacture of taxable goods is allowed, but subject to Rule 42/43 of the CGST Rules, 2017.

Situation 2- In my opinion, the facts are not covered under Section16 of the Act. It is alomst mandatory and free disposal of unwanted plastic waste. Hence it is outside the ambit of Section 7 of the Act.

[YAGAY andSUN]

1. ITC on Coal for Captive Power Generation:

Under Section 16(1) of the CGST Act, 2017, Input Tax Credit (ITC) is admissible on goods or services used in the course or furtherance of business. Though electricity is an exempt supply under Notification No. 2/2017-Central Tax (Rate), ITC on coal used in captive generation of electricity remains admissible where such electricity is consumed in manufacturing taxable goods.

CBIC Circular No. 125/44/2019-GST dated 18.11.2019 (para 5) clarifies that ITC on inputs used for generating electricity is allowed when the electricity is used within the factory for producing taxable output. The denial of ITC merely because electricity is an exempt supply is not sustainable where there is no outward supply of such electricity.

The view is also supported by rulings such as JSW Energy Ltd. (2018 (5) TMI 763 - AUTHORITY FOR ADVANCE RULINGS MAHARASHTRA), wherein coal used for captive generation was held eligible for ITC when electricity supported the manufacture of taxable supplies.

2. ITC on Waste Paper Containing Out Throws (Plastic):

Waste paper containing plastic out throws is used as a raw material. The plastic is separated and given to certified end users per MPCB norms, without any monetary consideration. This does not qualify as an exempt or non-taxable supply under GST.

Plastic is a taxable commodity. The absence of consideration does not automatically make the disposal exempt under GST, unless covered under Notification or Schedule entries. As per Section 17(2) and Rule 42 of the CGST Rules, ITC reversal is required only for inputs used in exempt supplies or non-business purposes. Since the plastic out throws arise inherently from the input and are not used for an exempt or personal purpose, ITC reversal is not warranted.

Judicial support is found in Tata Motors Ltd. v. CCE, 2012 (276) ELT 193 (Tri-Mum), which held that waste or by-products cleared without consideration do not require ITC reversal when they arise in the course of manufacturing.

Conclusion:

ITC on coal used in captive power generation is fully admissible where electricity is used to manufacture taxable goods. No ITC reversal is required for the plastic component in waste paper disposed of without consideration, as it does not constitute an exempt supply.

[Shilpi Jain]

If your final product is liable to GST then you should be eligible for the ITC of GST paid on coal. However, if yours is only domestic supplies, then the compensation cess paid on coal will become a cost.

In situation 2 the credit should be eligible as there is no exempt supply and it is a business expense with no specific blocking in the law to take credit.

[Sadanand Bulbule]

2025 (7) TMI 1180 - AUTHORITY FOR ADVANCE RULING, KERALA GOODS - In Re: M/s. Grand Centre Mall

The applicant shall be eligible to avail ITC on the solar power plant, subject to fulfillment of the other conditions prescribed under Section 16 of the CGST Act, 2017.

 

[Sadanand Bulbule]

 Following is worth to read:

2025 (8) TMI 245 - CHHATTISGARH HIGH COURT - Bharat Aluminium Company Limited Versus State of Chhattisgarh, Joint Commissioner (Appeals), State Tax, Bilaspur, Assistant Commissioner, State Tax, Korba.

AI Summary

ITC Allowed on Coal for Captive Power When Used in Taxable Manufacturing Goods Under GST Section 17 Input Tax Credit (ITC) on coal used for captive power generation is allowable when the electricity produced is consumed in manufacturing taxable goods, despite electricity being an exempt supply. This is supported by CBIC Circular 125/44/2019 and various rulings, which clarify that ITC denial solely due to electricity's exempt status is unsustainable. Regarding waste paper containing plastic out throws given free to certified end users, ITC reversal is not required since plastic is a taxable item and the disposal without consideration does not amount to an exempt supply. The plastic waste arises incidentally during manufacturing and is not used for exempt or non-business purposes, thus ITC remains admissible. Judicial precedents affirm that free disposal of by-products in manufacturing does not mandate ITC reversal. Compensation cess on coal may be non-creditable if supplies are domestic only. Overall, ITC claims in both scenarios are permissible under GST law, subject to compliance with relevant provisions.