GST Implications for Compressed Biogas (CBG) Plants in India

  

 

Summary of the report

The Compressed Biogas (CBG) sector in India, recognized for its strategic importance in energy security and environmental sustainability, operates within a continually evolving Goods and Services Tax (GST) framework. While CBG fuel itself benefits from a concessional GST rate of 5%, the taxation of the plant and its components has undergone significant changes. Notably, the GST rate for specified renewable energy devices, including biogas plants, falling under HSN Chapters 84, 85, or 94, transitioned from 5% to 12% effective October 1, 2021.

A pivotal aspect for large-scale CBG projects, particularly those involving Engineering, Procurement, and Construction (EPC) contracts, is the application of the "composite supply" rule. This rule mandates a 70:30 split for the valuation of goods and services respectively, leading to an effective GST rate of 13.8% (70% taxed at 12% for goods and 30% taxed at 18% for services). This clarification has brought much-needed predictability to project costing.

Input Tax Credit (ITC) on "plant and machinery," even if it constitutes immovable property, is generally eligible. This is a crucial benefit for CBG plant developers, as such assets are specifically excluded from the blocked credit provisions under Section 17(5)(d) of the CGST Act. This retrospective clarification from July 1, 2017, provides a significant advantage.

Adherence to strict timelines for claiming ITC is paramount. Credits must typically be availed by the earlier of November 30th of the financial year following the invoice date or the date of filing the annual return. This applies equally to components installed both before and after the Commercial Operation Date (COD) of the plant. It is essential to identify components that may attract higher GST rates (e.g., 18% for many general machinery items, 28% for certain fuel dispensing pumps) or are explicitly ineligible for ITC under specific conditions , such as goods used for personal purposes or where depreciation has been claimed on the GST component. Careful planning and documentation are critical for maximizing ITC and ensuring overall compliance.

1. Introduction to Compressed Biogas (CBG) Plants and India's GST Framework

 

1.1 Overview of the CBG Sector in India and its Strategic Importance

 

India possesses a vast potential for compressed biogas (CBG) production, estimated between 40 to 60 million metric tonnes per annum (MMTPA), with current installed capacity representing less than one percent of this potential. This highlights a significant untapped resource for renewable energy. The nation's growing energy security concerns and commitment to environmental sustainability underscore the importance of developing indigenous clean energy sources.

Recent governmental measures, such as the provision of market development assistance (MDA) to CBG producers for slurry offtake and the mandating of CBG blending with Compressed Natural Gas (CNG) and Piped Natural Gas (PNG), have revitalized private sector interest in the industry. These policy interventions underscore the government's commitment to promoting biofuels as a means to enhance energy security and reduce reliance on fossil fuels. The government's proactive measures in mandating CBG blending and providing market support directly influence the financial viability and attractiveness of CBG projects. For developers, a clear and favourable GST framework, particularly regarding Input Tax Credit (ITC), becomes even more critical. An efficient tax regime can significantly reduce project costs, thereby encouraging greater investment and accelerating the realization of India's CBG potential. Conversely, ambiguities or unfavourable tax treatments can impede growth despite policy support.

Beyond energy production, CBG projects offer substantial co-benefits. These include generating additional income and employment opportunities for farmers through the sale of cattle dung, improving village hygiene and sanitation, and contributing to lower greenhouse gas emissions. These multifaceted benefits position CBG as a crucial element in India's sustainable development agenda.

 

1.2 Fundamentals of Goods and Services Tax (GST) in India

 

GST in India is a comprehensive, multi-stage, destination-based tax levied on every value addition. It subsumed various indirect taxes, aiming to create a unified national market and simplify the tax structure. This unified system replaced a complex web of central and state indirect taxes, streamlining compliance and reducing the overall tax burden through the seamless flow of credits.

A cornerstone of the GST framework is the Input Tax Credit (ITC) mechanism. This allows registered businesses to claim credit for the GST paid on their inward supplies (purchases of goods and services) that are used or intended to be used in the course or furtherance of business. This credit can then be utilized to offset the GST payable on their outward supplies (sales), thereby eliminating the cascading effect of taxes, where tax is levied on tax. The ITC mechanism is designed to ensure that businesses only pay tax on the value they add, promoting efficiency across the supply chain.

The GST regime categorizes goods and services under various Harmonized System of Nomenclature (HSN) codes and Service Accounting Codes (SAC), respectively, each attracting specific tax rates (0%, 5%, 12%, 18%, 28%). For capital-intensive projects like CBG plants, the ability to claim ITC is not merely a compliance formality but a fundamental economic lever. It directly reduces the effective cost of acquiring expensive plant and machinery, which are classified as capital goods. Without efficient ITC utilization, the GST paid on inputs would become an added cost, significantly inflating project expenditures and potentially undermining financial viability. Therefore, a thorough understanding of ITC rules is essential for optimizing investment in long-term assets, boosting productivity, and fostering growth in the CBG sector.

2. GST Rates Applicable to Compressed Biogas (CBG) Plants and Components

2.1 GST Rate on Compressed Biogas (CBG) Fuel

Under the GST regime, 'Biogas' is explicitly covered and is taxable at a concessional rate of 5%. This is typically listed under Chapter 27 of the HSN, which covers mineral fuels, mineral oils, and products of their distillation. This concessional rate reflects the government's intent to promote the use of renewable energy.

Initially, there was some ambiguity regarding the specific GST rate for 'Compressed Biogas' (CBG), as it was not separately prescribed under GST law. This led to concerns that taxation at the 5% rate applicable to 'Biogas' might be challenged by GST authorities, creating uncertainty for producers and investors. The initial lack of a specific GST rate for CBG, despite a rate for biogas, highlighted a common challenge in nascent or evolving industries where tax frameworks may lag behind technological advancements and product differentiation. Such ambiguities can create uncertainty for investors and operators, potentially hindering market development.

However, subsequent clarifications from the GST Council have confirmed that Compressed Biogas (CBG) also attracts a 5% GST rate. This aligns CBG with the broader 'Biogas' classification for tax purposes, recognizing its role as a clean and renewable energy source. This clarification is crucial as it provides regulatory certainty, ensuring that the final energy product benefits from a consistent concessional rate, which is vital for the economic viability and promotion of CBG as a clean fuel. This demonstrates a responsive, albeit sometimes delayed, regulatory approach to support emerging sectors.

 

2.2 GST Rates on CBG Plant Equipment and Machinery

2.2.1 Evolution of GST Rates: From 5% to 12%

At the inception of GST, renewable energy devices and parts for their manufacture, including "Bio-gas plant," were subject to a concessional GST rate of 5%. This was stipulated under S. No. 234 of Schedule I of Notification No. 1/2017-Central Tax (Rate), provided they fell under GST Chapters 84, 85, or 94. This concessional rate was a key incentive to encourage investment in the renewable energy sector.

A significant policy change occurred effective October 1, 2021, when the GST rate on these renewable energy devices was increased from 5% to 12%. This revision was implemented through Notification No. 08/2021-Central Tax (Rate), which effectively omitted the entry from Schedule I (5% rate) and re-inserted it verbatim as S. No. 201A in Schedule II (12% rate) of Notification No. 1/2017-CT (Rate). The doubling of the GST rate on CBG plant equipment from 5% to 12% represents a direct increase in the capital expenditure for CBG plant developers. While still a concessional rate compared to the standard 18% or 28% rates, this change can significantly impact project economics and return on investment. This policy shift may reflect a government strategy to balance renewable energy promotion with revenue generation, or to address concerns about an "inverted duty structure" where inputs (at 5%) were taxed lower than some outputs, leading to accumulated ITC refunds. However, it also means higher upfront costs for developers, potentially slowing down investment if not adequately managed through efficient ITC utilization.

 

2.2.2 Analysis of Key Notifications: S. No. 234 of Schedule I and S. No. 201A of Schedule II of Notification No. 1/2017-Central Tax (Rate) as amended by Notification No. 08/2021-Central Tax (Rate).

 

S. No. 234 in Schedule I of Notification No. 1/2017-CT (Rate), dated June 28, 2017, originally provided for a 5% GST rate on "Bio-gas plant" and other specified renewable energy devices and their parts, provided they fell under Chapters 84, 85, or 94 of the GST Tariff. This entry was a cornerstone for concessional taxation in the renewable sector, aiming to reduce the upfront costs of establishing such plants.

This specific entry was subsequently omitted from Schedule I (which carried a 2.5% CGST + 2.5% SGST rate) and re-inserted verbatim as S. No. 201A in Schedule II (carrying a 6% CGST + 6% SGST rate) of the same notification. This amendment, primarily driven by Notification No. 08/2021-Central Tax (Rate) dated September 30, 2021, made the 12% rate effective from October 1, 2021. The change was a reclassification within the rate schedules, moving the items from a lower tax bracket to a higher one.

Crucially, the concessional rate (whether 5% or 12%) applies to equipment for biogas plants that fall under GST Chapters 84, 85, and 94. Suppliers are mandated to satisfy themselves with requisite documents from the buyer, such as supply contracts or orders for Waste-to-Energy (WTE) or Biogas projects, to ensure that the goods are indeed intended for use under this concessional category. This places a due diligence requirement on the supplier. The explicit requirement for suppliers to conduct due diligence and obtain documentation from buyers regarding the end-use of equipment for concessional rates introduces a significant compliance burden and potential risk for both parties. If the supplier fails to verify the intended use or if the buyer's documentation is insufficient, the concessional rate might be challenged, leading to demands for differential tax, interest, and penalties. This highlights the critical need for robust contractual agreements that clearly specify the intended use of components and allocate responsibility for maintaining necessary documentation. Proactive communication and record-keeping between buyers and suppliers are essential to mitigate audit risks and ensure the correct application of GST rates.

2.3 GST Treatment of Composite Supplies and Works Contracts for CBG Plant Installation

2.3.1 Applicability of the 70:30 Ratio for Goods and Services (Notification No. 24/2018-Central Tax (Rate))

For comprehensive contracts involving the supply of renewable energy devices (which includes biogas plants) along with associated services such as construction, engineering, or installation (commonly known as Engineering, Procurement, and Construction or EPC contracts), a specific valuation mechanism applies under GST. This mechanism is designed to provide clarity on the tax treatment of bundled supplies in the renewable energy sector.

Under this rule, 70% of the total gross consideration charged for such a composite supply is deemed to be the value of goods, which are then taxed at the applicable rate for renewable energy devices (currently 12%). The remaining 30% of the gross consideration is deemed to be the value of taxable services, which are taxed at the standard service rate of 18%. This specific apportionment results in an effective combined GST rate of 13.8% on the overall contract value (calculated as 70% * 12% + 30% * 18%). The explicit 70:30 composite supply rule is a significant policy clarification that provides much-needed certainty and predictability for large EPC contracts for CBG plants. Prior to this, there were disputes regarding whether such contracts should be treated entirely as works contracts (taxed at 18% on the full value) or as a mixed supply. This clear apportionment mechanism allows CBG plant developers to accurately estimate their GST liabilities on large projects, facilitating more precise financial planning, budgeting, and bid submissions. It reduces the risk of arbitrary tax assessments and ensures a more favorable overall tax incidence compared to a full 18% works contract rate.

The GST Council has further clarified that this 70:30 ratio is retrospectively applicable for the period from July 1, 2017, to December 31, 2018, in the same manner as prescribed for the period on or after January 1, 2019. However, this retrospective application does not entitle taxpayers to refunds for any differential tax paid during the earlier period. This regularization aims to settle past disputes without opening up avenues for large-scale refunds.

 

2.3.2 Legal Interpretations and Precedents (e.g., comparison with solar power projects)

While the 70:30 rule provides a clear valuation mechanism for composite supplies, the underlying legal classification of the overall plant as 'movable' or 'immovable' property has been a significant point of contention, particularly in the context of works contracts. Works contracts for immovable property generally attract an 18% GST rate and may have ITC restrictions under Section 17(5)(d) of the CGST Act, though "plant and machinery" is specifically excluded from this restriction.

A relevant legal precedent comes from the Andhra Pradesh High Court's ruling concerning solar power generating systems. The court held that the supply of a solar power generating system (SPGS) does not qualify as a works contract for immovable property but rather as a composite supply of goods. This ruling allowed for the application of a lower GST rate (5% at that time, now 12% for the goods portion under the composite supply rule) on the entire value of supply, rather than the 18% typically applicable to works contracts for immovable property.

The court's reasoning was critical: it observed that the solar power plant is not embedded in the earth for its permanent beneficial enjoyment but rather attached with nuts and bolts to a shallow foundation primarily for stability and vibration-free operation. Therefore, such attachment does not render it an 'immovable property' under GST law. The Andhra Pradesh High Court's ruling on solar power plants provides a powerful legal precedent that can be analogously applied to Compressed Biogas (CBG) plants. Given that CBG plants often involve similar installation methods—machinery fixed to foundations primarily for operational stability rather than permanent beneficial enjoyment of the land—this ruling strengthens the argument that CBG plant installations should also be treated as a composite supply of movable goods, rather than a works contract for immovable property. This interpretation is crucial for CBG developers as it reinforces the applicability of the more favorable 70:30 valuation rule and, importantly, ensures broader Input Tax Credit (ITC) eligibility on the entire plant, significantly reducing potential tax liabilities and mitigating risks of disputes with tax authorities. It provides a legal basis to challenge any attempts to classify the entire plant as an immovable property works contract, which could lead to higher tax and blocked ITC.

3. Harmonized System of Nomenclature (HSN) Codes for CBG Plant Components

HSN codes are globally recognized classification codes essential for accurate GST classification, determining the applicable tax rate, and ensuring proper compliance. For biogas plant equipment, the relevant HSN chapters are primarily 84, 85, and 94 , as specified in the renewable energy notifications. These chapters broadly cover machinery, electrical equipment, and furniture/lighting, respectively, which encompass a wide range of components used in CBG plants.

 

3.1 General HSN Codes for Biogas Plants

The HSN code 850100 is explicitly designated for "Bio-gas plant". This code falls under Chapter 85, which covers electrical machinery and equipment, and is specifically mentioned in the notifications granting concessional GST rates for renewable energy devices.

Additionally, HSN 84051090 is also listed with the description "OTHER GAS GENERATORS," and explicitly includes "Biogas Plant" as a product. This code falls under Chapter 84, covering nuclear reactors, boilers, machinery, and mechanical appliances. The existence of two distinct HSN codes (850100 and 84051090) explicitly mentioning "Biogas Plant" can lead to classification ambiguity and potential disputes. While 850100 broadly refers to the "Bio-gas plant" as an overall system, 84051090 is more specific to "Gas Generators." This distinction is critical because the concessional 12% GST rate for renewable energy devices applies to items falling under

Chapters 84, 85, or 94. Therefore, it is strategically important to classify the overall CBG plant, or its primary gas generation unit, under the most appropriate HSN within these concessional chapters to avail the lower rate. For individual components, a more granular HSN classification within or outside these chapters would apply, which might attract different rates, necessitating careful analysis to ensure compliance and maximize ITC.

 

3.2 Detailed HSN Codes and Applicable GST Rates for Specific Plant Sections/Components:

Gas Generators / Biogas Digesters

These are core components of a CBG plant where anaerobic digestion occurs to produce biogas. HSN 84051090 is categorized under "OTHER GAS GENERATORS" and specifically includes "Biogas Plant" as a product. Other related subheadings include 84051010 ("PRODUCER GAS AND WATER GAS GENERATORS") and 84051020 ("ACETYLENE GAS GENERATORS (WATER PROCESS)"). Parts of gas generators fall under HSN 84059000. The general GST rate for HSN 8405 is consistently 18%. A notable discrepancy arises here. While the overarching "Bio-gas plant" (HSN 850100) is eligible for the 12% GST rate as a renewable energy device under Chapter 85 , the HSN 84051090, which also describes "Biogas Plant" or "Gas Generators," consistently attracts an 18% GST rate. This suggests a potential classification conflict or a distinction between the "plant" as a complete system and specific "gas generation" machinery components within it. Given that the 12% rate for renewable energy devices applies to items under

Chapters 84, 85, or 94 , components like digesters/gas generators, if demonstrably "parts for their manufacture" of a biogas plant, should ideally also qualify for the 12% concessional rate, despite their general HSN rate. This requires careful interpretation and justification based on the specific wording of Notification No. 08/2021-CT (Rate) and the functional role of the component within the overall CBG plant.

 

Biogas Purification Units / Processors

 

After initial biogas generation, purification is essential to remove impurities like CO2, H2S, and water vapor to produce CBG. These units fall under HSN 8421, which covers "Centrifuges, Including Centrifugal Dryers; Filtering Or Purifying Machinery And Apparatus, For Liquids Or Gases". More specifically, HSN 84213990 includes "OTHERS" in this category, such as "PRESSURE SWING ADSORPTION MODULE - BIOGAS PROCESSOR -PARTS OF GAS PURIFIER". This subheading also lists various air and gas treatment equipment. The general GST rate for HSN 8421 is 18%. Similar to gas generators, while the general HSN 8421 for purification units attracts an 18% GST rate, if these units are integral "parts for their manufacture" of a "Bio-gas plant" and fall under Chapter 84, they should be eligible for the 12% concessional rate as per Notification No. 08/2021-CT (Rate). The purification process is a critical step in producing CBG. Therefore, it is arguable that these components are essential to the "Bio-gas plant" and should benefit from the lower rate. This requires robust documentation and clear justification of their specific function and indispensable role within the CBG plant's operation for GST classification purposes.

 

Biogas Compressors (High Pressure)

 

High-pressure compressors are used to compress the purified biogas into CBG, enabling its storage and transportation. Biogas compressors are classified under HSN 8414, which covers "Air or vacuum pumps, air or other gas compressors and fans". Specific subheadings relevant to compressors include 8414.30 (compressors for refrigerating equipment), 8414.40 (air compressors mounted on wheeled chassis), and 8414.80 (other air or gas compressors). HSN 8414.80.12 specifically covers piston compressors with a gauge pressure capacity exceeding 15 bar, which would be relevant for high-pressure CBG applications. The general GST rate for HSN 8414 is 18%. While some sources indicate 28% for certain categories like "Pumps for dispensing fuel or lubricants" , these are distinct from biogas compressors used for plant operations. Similar to purification units, while general compressors under HSN 8414 typically attract an 18% GST rate, high-pressure biogas compressors are fundamental to the operation of a CBG plant. As such, if they are considered integral "parts for their manufacture" of a "Bio-gas plant" and fall under Chapter 84, they should qualify for the 12% concessional rate as per Notification No. 08/2021-CT (Rate). This reinforces the principle that the component's direct and essential role in the renewable energy generation process should determine its GST classification, overriding a general HSN rate if it falls within the specified chapters.

 

Gas Storage Cascades / Containers

These units are used for storing the compressed biogas before distribution. These storage units are classified under HSN 731100, which broadly covers "Containers for compressed or liquefied gas, of iron or steel". Specific subheadings include 73110010 (LPG cylinders), 73110020 (low pressure cylinders), 73110030 (high pressure cylinders), and 73110090 (other pressure containers for transport or storage of compressed gases). The GST rate for HSN 7311 is consistently 18%. HSN 996722 ("Bulk liquid or gas storage services")  refers to services and not the physical containers themselves. Unlike the core machinery components of a CBG plant that fall under Chapters 84, 85, or 94, gas storage containers (HSN 7311) are classified under Chapter 73 (Iron or Steel Articles). This distinction is crucial because the 12% concessional rate specifically applies to "renewable energy devices and parts for their manufacture" falling under Chapters 84, 85, or 94. Therefore, it is highly probable that these storage containers will

not qualify for the 12% concessional rate and will instead attract the general 18% GST rate. This represents a higher cost component for the storage section of the plant, necessitating careful financial planning and ITC management.

CBG Dispensing Units

 

These units are used for dispensing CBG as vehicle fuel or for other applications. They are typically classified under HSN 8413, which covers "Pumps for liquids," specifically 841311 for "pumps for dispensing fuel or lubricants, of the type used in filling stations or in garages". The general GST rate for HSN 8413 is 18%. However, it is important to note that some sources indicate a 28% GST rate for certain fuel dispensing pumps. The potential for a 18% or 28% GST rate for CBG dispensing units, depending on their specific functional classification, directly impacts the final cost to the consumer and the overall project economics. If classified as a general pump, the 18% rate may apply. However, if it is clearly identifiable as a fuel dispensing pump for vehicles, the higher 28% rate is more likely. This requires precise HSN classification based on the

primary function of the unit and its intended use at the point of sale.

 

CBG Bottling Plant Equipment

For CBG that is to be bottled and distributed in cylinders, specialized bottling equipment is required. This machinery is typically classified under HSN 8422, which covers "Machinery for filling, closing, sealing or labelling bottles, cans, boxes, bags or other containers". The general GST rate for HSN 8422 is 18%. While integral to the CBG

value chain, bottling equipment is generally standard industrial machinery, not directly a "renewable energy device" itself. Therefore, the 18% rate is likely to apply, increasing the cost of the bottling segment of the project. This highlights that not all parts of the broader CBG ecosystem qualify for concessional renewable energy rates, and a clear distinction must be made between core renewable energy generation components and ancillary industrial equipment.

4. Input Tax Credit (ITC) for Compressed Biogas (CBG) Plants

 

4.1 Eligibility of ITC for Plant and Machinery

Input Tax Credit (ITC) on capital goods is a fundamental benefit under the GST regime. "Capital goods" are defined as goods the value of which is capitalized in the books of accounts and which are used or intended to be used in the course or furtherance of business. ITC is generally available for capital goods used for business purposes, enabling businesses to offset their output tax liability.

A crucial aspect for CBG plants is the treatment of "plant and machinery." Section 17(5)(d) of the CGST Act specifically excludes "plant and machinery" from the list of blocked credits, even if such assets are of an immovable nature, provided they are used in the course or furtherance of business. This retrospective amendment, effective from July 1, 2017, is a key benefit, ensuring that major capital outlays on CBG plant infrastructure are eligible for ITC. The retrospective clarification for plant and machinery is a significant investment incentive, ensuring ITC availability for major capital outlays in CBG projects. This reduces the effective cost of investment and promotes long-term asset acquisition, which is vital for capital-intensive ventures like renewable energy plants.

 

4.2 Conditions for Availing ITC

 

To claim ITC, a registered person (buyer) must fulfill several conditions:

●       Possession of Valid Documents: The taxpayer must possess a valid tax invoice, debit note, or any other document prescribed under GST that supports the purchase of goods or services. The invoice must clearly show the GST amount paid and the details of the supplier.

●       Receipt of Goods/Services: The goods or services must have been received by the recipient. If goods are received in lots or installments, ITC can be claimed only when the last lot or installment is received.

●       Tax Payment by Supplier: The tax charged by the supplier must have been paid to the government, either in cash or through the utilization of admissible input tax credit, and the supplier must have filed their GST returns.

●       Recipient's Return Filing: The recipient must have filed their Goods and Services Tax Return in Form GSTR-3B.

●       Payment to Supplier within 180 Days: The recipient must pay the supplier the value of goods or services along with the tax within 180 days from the invoice date. Failure to do so will result in the ITC availed being added back to the recipient's output tax liability, along with interest. However, the credit can be reclaimed once the payment is made.

●       No Depreciation on GST Component: ITC cannot be claimed if depreciation has been claimed on the tax component of capital goods under the provisions of the Income Tax Act, 1961. This is an anti-double benefit provision.

●       Use for Business Purposes: The goods or services purchased must be used in the course or furtherance of business for making taxable supplies. ITC is not available for personal use or for making exempt supplies.

●       Matching with GSTR-2B: From January 1, 2022, a taxpayer can claim ITC only if the same appears in their GSTR-2B. No provisional ITC can be claimed from this date onwards, making matching of the purchase register with GSTR-2B crucial.

These conditions are not merely checkboxes but operational imperatives. Failure to meet them leads to ITC reversal, financial penalties, and audit risks. This underscores the need for robust internal controls, vendor management, and continuous reconciliation processes within the organization to ensure compliance and maximize legitimate ITC claims.

 

4.3 Time Limit for Claiming ITC on Plant and Machinery

 

The time limit to claim Input Tax Credit under GST is stipulated in Section 16(4) of the CGST Act, 2017. ITC on invoices or debit notes issued in a financial year must be claimed by the earlier of two dates:

●       The 30th of November of the financial year following the one in which the invoice or debit note was issued, OR

●       The date of filing the annual return (Form GSTR-9) for that financial year.

For instance, if an invoice for plant and machinery is issued on December 30, 2023 (Financial Year 2023-24), the ITC must be claimed before November 30, 2024, or the date of filing the annual return for FY 2023-24, whichever is earlier. While ITC is reported in GSTR-3B, typically due by the 20th of the following month, it can still be claimed with late fees up to November 30th for the relevant financial year. The strict statutory deadline for claiming ITC is a non-negotiable aspect of GST compliance. Failure to adhere to this timeframe results in the permanent forfeiture of the credit, directly impacting the financial health of a CBG project. This emphasizes the need for proactive and robust financial and tax management systems that ensure timely invoice processing, reconciliation with GSTR-2B, and accurate filing of returns. Diligence in this area is paramount to avoid significant financial losses.

 

4.4 Treatment of ITC for Components Installed After Commercial Operation Date (COD)

 

Input Tax Credit can be claimed for capital goods and inputs installed after the Commercial Operation Date (COD) of a CBG plant, provided all general conditions for ITC availment are met. The fundamental criterion is that the goods or services are used "in the course or furtherance of business". Post-COD installations, such as upgrades, expansions, replacements of worn-out parts, or new technology integrations, clearly fall under this definition as they contribute to the ongoing operation, efficiency, or capacity of the plant.

The time limit for claiming ITC (the earlier of November 30th of the next financial year or the annual return filing date) applies to these post-COD purchases based on their individual invoice dates, not the plant's original COD. This means each new purchase after COD triggers its own ITC eligibility period. The ability to claim ITC on components installed after COD provides crucial operational flexibility for CBG plant operators. It recognizes that industrial plants undergo continuous upgrades, maintenance, and expansions throughout their lifecycle. This ensures that investments made to enhance efficiency, capacity, or compliance post-initial commissioning are not unduly burdened by non-creditable GST. However, it equally underscores the need for continuous, diligent compliance, as each post-COD purchase triggers its own set of ITC conditions and timelines, requiring ongoing attention to documentation and filing.

 

4.5 Process for Claiming ITC

Claiming Input Tax Credit under GST involves a systematic approach to ensure compliance and maximize eligible credits:

●       Step 1: Verify GST Registration and Eligible Purchases: The business must be registered under GST and ensure its GSTIN is active. All purchases must be reviewed to confirm their eligibility for ITC, meaning they are used for business purposes and are not blocked credits.

●       Step 2: Collect and Organize Required Documents: Meticulous collection of all relevant documents is paramount. This includes valid tax invoices, debit notes, credit notes, purchase orders, delivery challans, and GST payment receipts. These documents serve as primary evidence for ITC claims.

●       Step 3: Submit Monthly GST Return (GSTR-3B): Businesses must submit Form GSTR-3B monthly (or quarterly for certain taxpayers) to declare their output tax liability and eligible input tax credits. This return is generally due by the 20th of the following month.

●       Step 4: Review and Reconcile ITC with GSTR-2B: This is a crucial step. The ITC claimed in GSTR-3B must accurately correspond to the purchase details auto-populated in Form GSTR-2B, which is generated based on supplier filings. From January 1, 2022, provisional ITC claims are no longer permitted, making precise matching essential. Any discrepancies or mismatches should be promptly resolved with suppliers.

●       Step 5: Maintain Records: Comprehensive and meticulous records of all transactions for which ITC is being claimed must be maintained. This includes invoices, payment proofs, and reconciliation statements. Such records are vital for audit preparedness and departmental scrutiny.

●       Step 6: ITC Utilisation: Once claimed, ITC is credited to the Electronic Credit Ledger on the GST portal. This credit can then be utilized to offset GST liabilities. The order of utilization is generally Integrated GST (IGST) first, followed by Central GST (CGST) and State GST (SGST).

The multi-step process for claiming ITC highlights that it is a systematic and ongoing compliance activity, not a one-time event. Each step, from documentation to reconciliation, is critical. A robust internal system for managing invoices, tracking payments, and reconciling data with the GST portal is indispensable. This systematic approach not only maximizes ITC recovery but also ensures audit readiness, minimizing potential interest, penalties, or disallowances during departmental scrutiny.

5. GST ITC Ineligible Components and Scenarios for CBG Plants

While ITC is a broad benefit under GST, certain goods and services are specifically excluded or "blocked" from ITC claims under Section 17(5) of the CGST Act, or other provisions. Understanding these exclusions is vital for CBG plant developers to avoid compliance pitfalls.

 

5.1 Blocked Credits under Section 17(5) of CGST Act

●       Immovable Property (excluding Plant and Machinery): ITC is generally disallowed for goods or services used for the construction of immovable property on one's own account, even if used in the course or furtherance of business. However, a critical exception exists for "plant and machinery". This exception is particularly beneficial for CBG plants, as it ensures that ITC is available on the machinery and equipment that form the core of the plant, even if fixed to the earth.

●       Personal Use/Non-Business Purposes: Goods or services used for non-business purposes or personal consumption are explicitly ineligible for ITC. This requires clear segregation of business and personal expenses.

●       Gifts, Free Samples, Lost/Stolen/Destroyed Goods: No ITC is available for goods that are lost, stolen, destroyed, written off, or given as gifts or free samples. This is because these goods do not result in a taxable outward supply.

●       Specific Services:

○       Food and beverages, club membership, outdoor catering, beauty treatments, health services, and rent-a-cab services are generally ineligible for ITC.

○       General insurance, servicing, repair, and maintenance services related to motor vehicles, vessels, or aircraft are also typically blocked, with specific exceptions. ITC is allowed if these services are used for the supply of other vehicles/conveyances, transportation of passengers or goods, or imparting training on driving/flying/navigating such vehicles.

○       Life insurance and health insurance premiums are ineligible for ITC, except when mandated by the government for an employer to provide to employees, or when part of a mixed or composite supply.

●       Motor Vehicles and Conveyances: ITC is restricted for motor vehicles with a seating capacity of 13 persons or fewer (including the driver). Exceptions apply if the vehicle is used for further supply of such vehicles, transportation of passengers, transportation of goods, or imparting training.

 

5.2 Depreciation Claimed on GST Component

A crucial anti-double benefit provision states that if depreciation has been claimed on the tax component of capital goods under the provisions of the Income Tax Act, 1961, then Input Tax Credit cannot be claimed on the same GST amount. The prohibition against claiming ITC when depreciation has already been availed on the GST component of capital goods is a fundamental principle of tax law to prevent dual benefits. This necessitates close coordination between the finance/accounting and tax departments within a CBG project entity. Accounting practices must ensure that the GST component of capital goods is either capitalized (allowing depreciation) or expensed (allowing ITC), but not both. This integration is vital for accurate financial reporting and avoiding future audit disallowances.

 

5.3 Components Not Directly Used in Business or Taxable Supplies

Input Tax Credit is only available for purchases that are used in the course or furtherance of business for making taxable supplies. If capital goods are used for both business and non-business purposes, or for making both taxable and exempt supplies, the ITC attributable to the non-business or exempt supplies must be proportionately reversed as per Rule 42 (for inputs/input services) and Rule 43 (for capital goods) of the CGST Rules. The proportionality principle, requiring ITC reversal for non-business or exempt supplies, underscores the need for clear operational segregation within a CBG plant. If a plant produces both taxable CBG and, for instance, exempt bio-slurry used for non-taxable agricultural purposes, the ITC attributable to the exempt output may need to be reversed. This requires meticulous record-keeping to accurately identify and allocate inputs to taxable versus non-taxable activities, adding a layer of complexity to compliance.

 

5.4 Works Contracts for Immovable Property (General vs. Plant & Machinery)

 

While works contracts relating to the construction of immovable property are generally blocked for ITC under Section 17(5)(c) of the CGST Act, the exception for "plant and machinery" is critical for industrial projects like CBG plants. This means ITC is available on works contracts specifically for the construction or installation of plant and machinery.

It is important to distinguish between "capital goods" (physical assets capitalized in books) and "input services" (services that might be capitalized for accounting purposes but retain their character as services under GST law). For instance, in Lump Sum Turnkey (LSTK) contracts for the construction of industrial plants, the entire supply might be treated as a works contract service. Even if the total cost is capitalized as part of plant and machinery in the books, the supply remains a "service" for GST purposes. Consequently, ITC on such capitalized services (e.g., architectural fees, design services) is treated as ITC on input services and is governed by Rule 42 for reversal, not Rule 43 which applies to capital goods. The distinction between "capital goods" (physical assets) and "input services" (services capitalized for accounting, e.g., LSTK contracts) is a crucial nuance in GST. While both might be capitalized, their treatment for ITC reversal (Rule 43 for capital goods, Rule 42 for input services) differs. This demands careful classification of expenditures, especially in complex EPC contracts, to ensure correct ITC availment and reversal, preventing future disputes and ensuring accurate tax positions.

6. HSN Codes for ITC Eligibility and Notification Applicability

 

6.1 HSN Codes where ITC is Generally Available

 

Input Tax Credit is generally available on all goods and services used in the course or furtherance of business, provided they are not specifically blocked under Section 17(5) of the CGST Act. For CBG plants, this primarily includes:

●       Machinery and equipment: Components falling under Chapters 84, 85, and 94 are particularly relevant as they are eligible for concessional rates (5% initially, now 12%) as "renewable energy devices & parts for their manufacture". This encompasses a wide array of equipment such as:

○       Biogas digesters (HSN 850100, potentially 84051090).

○       Purification units (HSN 8421).

○       Compressors (HSN 8414).

○       Other electrical machinery (e.g., motors, generators under HSN 8501, transformers under HSN 8504).

○       Heat exchange units (HSN 8419).

●       Raw materials and consumables: Any materials directly consumed or used in the operation and maintenance of the plant, such as chemicals, lubricants, and spare parts, are generally eligible for ITC.

●       Input services: Services essential for the plant's establishment and operation, such as engineering, design, installation (for the 30% service portion of composite supply), and other operational services, are typically eligible for ITC.

The key notification enabling ITC on plant and machinery, even if it becomes immovable property, is the retrospective amendment to Section 17(5)(d) of the CGST Act, effective July 1, 2017. This amendment specifically carved out plant and machinery from the blocked credit list, recognizing their essential role in business operations.

 

6.2 Applicability of Notifications for ITC

The eligibility and availment of ITC for CBG plants are governed by a combination of the CGST Act and various notifications and circulars issued by the Central Board of Indirect Taxes and Customs (CBIC):

●       Notification No. 1/2017-Central Tax (Rate) (as amended): This foundational notification, particularly S. No. 201A of Schedule II (which replaced S. No. 234 of Schedule I), specifies the 12% GST rate on "Bio-gas plant" and its parts falling under Chapters 84, 85, or 94. ITC is available on these goods, provided they are used for making taxable supplies and all other general conditions for ITC availment are met.

●       Notification No. 24/2018-Central Tax (Rate): This notification, along with subsequent clarifications, establishes the 70:30 ratio for composite supplies involving renewable energy projects, leading to an effective 13.8% GST rate. ITC is available on both the goods and services components of such composite supplies, subject to general ITC rules and the specific conditions outlined in the notification.

●       CBIC Circulars: Various circulars issued by the CBIC provide crucial clarifications on the scope and applicability of GST rates and ITC provisions. For example, circulars clarifying the composite supply rule for renewable energy projects (e.g., those relating to solar power, which can be analogously applied to biogas plants) are instrumental for understanding ITC eligibility in EPC contracts and resolving classification ambiguities. These circulars often address specific industry concerns and provide guidance on complex scenarios.

The applicability of ITC for CBG plants is not determined by a single notification but by a layered framework of the CGST Act, specific rate notifications, and clarifying circulars. This dynamic regulatory environment necessitates continuous monitoring of updates and a nuanced interpretation of provisions. The ability to leverage clarifications (like the AP High Court ruling for solar, which can be extended to CBG) and understand the interplay between general ITC rules and specific renewable energy incentives is crucial for optimizing tax positions and ensuring full compliance. Proactive engagement with tax professionals and a robust internal compliance mechanism are essential to navigate this complex landscape effectively.

7. Conclusions and Recommendations

The GST framework for Compressed Biogas (CBG) plants in India presents a nuanced landscape, characterized by specific concessional rates for the fuel and the core plant components, coupled with detailed rules for Input Tax Credit (ITC) availment. Understanding and diligently applying these provisions are paramount for the financial viability and regulatory compliance of CBG projects.

Key Conclusions:

●       CBG Fuel Rate: Compressed Biogas (CBG) fuel is consistently taxed at a concessional rate of 5%, aligning with the broader classification of 'Biogas' under HSN Chapter 27. This favorable rate supports the marketability and adoption of CBG as a clean fuel.

●       Plant and Equipment Rates: Core CBG plant equipment and renewable energy devices falling under HSN Chapters 84, 85, or 94 are subject to a 12% GST rate, effective October 1, 2021 (previously 5%). This rate applies to components integral to the "Bio-gas plant" or "parts for their manufacture."

●       Composite Supply for EPC Contracts: For comprehensive Engineering, Procurement, and Construction (EPC) contracts for CBG plants, the "composite supply" rule applies, mandating a 70:30 valuation split between goods and services, respectively. This results in an effective GST rate of 13.8% on the overall contract value (70% at 12% for goods, 30% at 18% for services). This clarity is crucial for project budgeting and risk management.

●       ITC Eligibility on Plant and Machinery: A significant advantage for CBG projects is the general eligibility of ITC on "plant and machinery," even if it constitutes immovable property. Section 17(5)(d) of the CGST Act explicitly excludes such assets from blocked credits, a retrospective clarification effective from July 1, 2017. This ensures that major capital investments in CBG infrastructure are eligible for ITC.

●       ITC on Post-COD Installations: ITC can be claimed on components and services installed after the Commercial Operation Date (COD) of the plant, provided they are used in the course or furtherance of business. The standard ITC conditions and time limits apply to these subsequent purchases based on their invoice dates.

●       HSN Code Nuances: While general HSN codes for certain components like gas generators (8405) or purification units (8421) may indicate an 18% rate, the specific renewable energy notifications should prevail, allowing for the 12% concessional rate if these are integral "parts for their manufacture" of a biogas plant and fall within Chapters 84, 85, or 94. However, components like gas storage cascades (HSN 7311) and bottling equipment (HSN 8422) are likely to attract the general 18% rate as they typically fall outside the specified chapters for renewable energy devices. CBG dispensing units (HSN 8413) may attract 18% or even 28% depending on their specific functional classification as fuel dispensers.

●       Ineligible ITC: ITC is blocked for personal use, goods lost/stolen/destroyed, and certain specific services (e.g., food & beverages, general insurance for personal vehicles). Crucially, ITC cannot be claimed if depreciation has already been availed on the GST component of capital goods under the Income Tax Act.