On 4 September 2025, the GST Council approved a sharp reduction in the Goods and Services Tax (GST) rate for solar cells and modules – from 12 % down to 5 % effective 22 September. The measure was presented as a boost to India’s renewable-energy push. With a precise aim of reducing capital expenditure, encouraging domestic manufacturing, and enhancing project viability.

However, industry stakeholders warn that the relief is limited. Though tax on modules has fallen, the ability of developers to claim Input Tax Credit (ITC) has not kept pace. This constraint may markedly blunt the intended benefit.

This article analyses the new GST change, explores the practical and structural challenges, and discusses what those in the solar sector should watch for going forward.

Why the GST Cut Mattered

The rationale for lowering GST on solar modules and related equipment was multi-fold:

Lower upfront equipment cost: By bringing modules into the 5% slab, the cost base of solar projects was expected to be reduced. For example, the reduction was projected to cut the capital cost of solar and wind at scale by up to 5 %.

Strengthen ‘Make in India’ and domestic manufacturing: With module and component manufacturing gaining traction, lower tax rates drive the competitiveness of Indian-made goods vis-à-vis imports.

Support the clean-energy target: With India targeting 500 GW of non-fossil fuel capacity by 2030, reducing equipment costs is critical to achieving capacity deployment and moderating tariffs.

Thus, from a policy perspective, the tax cut was strongly aligned with both industry growth and strategic energy goals.

The Input Credit Problem

Despite the drop in GST rates, developers say the relief is modest due to input tax credit (ITC) issues. A few specific mechanics:

  • Under the earlier regime (when modules attracted 18% GST), developers could avail of ITC on equipment purchases. With a reduction to 5 %, the advantage of ITC becomes less clear.

  • Many solar electricity supplies are exempt or zero-rated under GST. When output supplies attract zero/lowest tax, but inputs carry higher tax, an “inverted duty structure” arises, leading to blocked credits and cash-flow strain.

  • While the GST law allows refund of unutilised ITC in an inverted-duty scenario, the procedural bottlenecks, documentation requirements, and timing delays reduce the practical benefit.

In short, developers are saying: yes, equipment is slightly cheaper – but the advantage is eroded by their inability to fully leverage ITC or secure timely refunds. That means the benefit may not flow through to tariffs. Nor will it project economics in a meaningful way – at least not immediately.

Structural and Practical Constraints

These are some of the key constraints dampening the impact:

1. Pre-existing projects and PPAs

Many solar-power projects were bid and contracted under power-purchase agreements (PPAs) before the tax-cut announcement. For these, the timing of invoicing and equipment procurement may not align neatly with the revised GST rate or refund mechanism. The Central Electricity Regulatory Commission (CERC) issued a suo-moto order on 4 November 2025 declaring the tax cut a “Change in Law” under renewable-energy PPAs and mandating that developers pass on the benefits to discoms or claim refunds. However, developers must provide auditor-certified proof of cost reduction and reconciled invoices. These requirements add layers of compliance and delay.

2. Cash-flow and refund timing

For inverted duty structure cases, even though a refund is legally permissible, long processing times and accumulating credits weigh on working capital. Some developers argue that while legal eligibility exists, the practical ability to monetize the credit remains constrained.

3. Deeper inversion risk

By lowering the output tax (module equipment) to 5%, while electricity output remains exempt or zero-rated, the inverted duty gap may widen unless inputs are also taxed at similarly low rates or refund mechanisms are accelerated. If the input slab remains high relative to the output, the burden shifts to refund systems.

4. Project-specific cost pass-through

Even when equipment costs fall, whether the benefit reaches end consumers depends on the contractual mechanics: sharing savings in PPAs, renegotiation with discoms, and audit timelines. Many developers report only modest tariff relief so far – on the order of ~0.5–1 percentage point.

Why the GST Relief is Limited (for Now)

Putting the above together, the reason relief is limited can be summarised plainly:

  • The tax cut affects the upfront equipment cost. But for full benefit, ITC must be usable, or cash flow should not be blocked.

  • Projects under older contracts may not flex easily to reflect the new cost structure.

  • The refund and compliance systems are not instantaneous; the timing lag reduces near-term value.

  • Even when cost reduction occurs, the mechanism for passing it through to tariffs or staying within the project economics may limit its visible impact.

Ultimately, the cut did lower equipment tax – but it did not (yet) fully unblock the indirect tax credit loop. For developers and manufacturers, liquidity and certainty matter more than a point or two of tax-rate reduction.

Implications for Developers, Manufacturers, and Policy Makers

For Developers & EPC contractors

  • Conduct a detailed review of invoicing dates, equipment procurement, and PPA terms to map eligibility for benefits.

  • Track and diligently document audit-certified savings from the GST reduction, which will be needed for a refund or tariff renegotiation under the CERC order.

  • Monitor working-capital impact: unpaid or delayed refunds may negate upfront savings.

  • Factor the modest near-term tariff benefit into bid models. Avoid over-relying on rate cuts as a game-changer, unless input credit systems improve.

For Module & Component Manufacturers

  • Use the lower GST rate as a marketing proposition, but also factor in supply-chain costs, backward integration, and potentially delayed downstream benefit realisation.

  • Seek to align procurement to maximise benefits: sourcing domestic components (which may have different tax profiles) becomes more meaningful in the context of a ‘5 %’ regime.

  • Stay vigilant for issues related to an inverted duty structure, especially if the ultimate output (electricity) is exempt or zero-rated.

For Policy Makers and Regulators

  • Focus on streamlining refund mechanisms for unutilised ITC: accelerate processing, reduce documentation burden, and provide provisional refunds. The GST-inverted-duty issue is well identified.

  • Clarify the cut-over mechanics for contracts, bids, and invoices. For example, specify clearly which projects (pre- or post-September) qualify for the benefit. The CERC order is a step, but operational clarity will help.

  • Consider further rate rationalisation upstream (balance-of-system goods) if input taxation remains high. Simply lowering the module GST may not be sufficient.

  • Monitor whether the savings translate into lower tariffs for end consumers or better project viability, not just lower tax slabs.

Looking Ahead: What Key Indicators to Watch

For sector participants and tax advisors, the following indicators merit close tracking:

  • Refund processing timelines and amounts: If claims under the inverted duty structure begin flowing faster, that will improve cash flow and mark a real shift.

  • Tariff revisions and auctions: Future PPA bids may reflect lower equipment cost. If the differential shows up meaningfully, the tax change will have punched through.

  • Domestic manufacturing uptick: Whether the tax cut drives more module/component manufacturing in India (as the policy aimed) or merely shifts supply sourcing remains to be observed.

  • Working-capital impact: Developers and EPC firms may report reduced financing costs or shorter project cycles if the tax system friction eases.

  • Depth of cost-benefit passed on: Anecdotal reports suggest that only ~0.5-1% of the benefit has reached consumers so far. The question will be whether that expands materially.

Conclusion

The GST cut from 12 % to 5 % on solar modules and related renewable energy equipment was a welcome, strategically aligned measure. It offers a foundation for cost-reduction, manufacturing impetus, and cleaner economics in India’s energy transition. But for many developers, the practical relief remains limited because the input-credit mechanics and refund infrastructure have yet to fully deliver.

For the solar sector, this means: don’t treat the rate cut as a silver bullet. Instead, pair it with robust compliance, cash-flow planning, documentation readiness, and close monitoring of refund system performance. For policy makers, the warning is clear: tax rate changes must be coupled with system-level fixes to truly unlock impact.

As India marches toward its 2030 clean-energy targets, the design of indirect taxes will matter nearly as much as tariffs, technology, and manufacturing. The GST reform is a step, but converting it into sector-wide relief will require follow-through.