Applicability of GST on the activity of construction of road where considerations are received in deferred payment (annuity)-
Background:- In the 22nd GST council meeting held on 06/10/2017, it was discussed among the GST council members that annuity is an amount paid by the National Highways Authority of India (NHAI) to concessionaires for construction of roads in order that the concessionaire did not charge toll for access to a road or a bridge. In other words, annuity is a consideration for the service provided by concessionaires to NHAI. The Joint Secretary (TRU-Il), CBEC stated that the Council may take a view for grant of exemption to annuity paid by NHAI/State Highways Construction Authority to concessionaires during construction of roads. He added that access to a road or bridge on payment of toll was already exempt from tax. The Hon'ble Minister from Haryana suggested covering annuity paid by State-owned Corporations also. After discussion, the Council decided to treat annuity at par with toll and to exempt from tax vide entry no. 23A.
However, the entry no. 23A was inserted via Notification no. 32/2017-CTR dated 13/10/2017 & simultaneously amends the original notification no. 12/2017-CTR as “Service by way of access to a road or a bridge on payment of annuity” after making above discussions in the meeting. The said entry stimulates the exemption to the annuity paid to the developers/concessionaires of the roads or bridge & creates the ambiguity whether the exemption is for annuity received for the part of the cost of construction of road or bridge or for the annuity payment by the authority to the developer for the collection of the toll charges.
Reference to Advance ruling:- One of the Developers/applicant/ Concessionaire named as “Nagaur Mukangarh Highways (P.) Ltd.” engaged in the construction of road & bridge has filed an advance ruling with Rajasthan authority. The service was to provide to the State Government for construction of a road on design, build, operate and transfer (DBOT) basis. The work of operation & maintenance for the aforesaid project is awarded for 10 years. The applicant has to receive 50% of the cost of the construction in 5 equal installments on the basis of the achievement of the milestones. The balance 50% of the project cost is to be paid bi-annually along with interest (hereinafter referred to as 'Annuity Payments') over the operation & maintenance (O&M) period.
The applicant approached the Authority for Advance Ruling seeking ruling on the following questions:
- Whether it is entitled to claim full input tax credit (ITC) on goods and services used for construction of project during construction period.
- Whether it is entitled to claim ITC pertaining to procurement of goods and services during O & M period after reversal of input tax credit as per section 17(2) of CGST Act read with rule 42 of CGST Rules, as annuity payment received during said period is exempt, whereas O & M payments received are subject to GST.
- The applicant contended that the said annuity is exempted under Entry No. 23A of the Notification No. 12/2017-CT (Rate), dated 28-6-2017, is not tenable by the AAR-Rajasthan. Entry No. 23A pertains to SAC 9967, which is for support services of transport services, whereas the services provided by the applicant is classifiable under SAC 9954, which is liable to tax at the applicable rate of GST. In the given circumstances, the applicant has to pay GST on full value of cost of project during the period of construction. The annuity received by the applicant is already GST paid during the construction period for which interest is also paid by the Government. The applicant is rendering taxable services during the construction of roads which is liable to tax. Hence, it is entitled to claim full input tax credit under the provisions of section 16(1).
- In respect of second question, the applicant’s contention is not acceptable for reversing the common ITC as Annuity Payment received during the O&M period is exempted and payment received for O&M is subject to GST levy. However, the applicant is entitled to claim input tax credit on supplies of goods and services or both procured for use in taxable outward supply of O&M service.
AAAR-Rajasthan order:- Aggrieved with the order of the AAR, applicant filed an appeal with APPELLATE AUTHORITY FOR ADVANCE RULING, RAJASTHAN. The AAAR has ordered as-
- the activity of the Appellant (i.e. Concessionaire) having nexus with annuity which is classifiable under SAC 9967 and activity of the Appellant having nexus with the construction payments during construction phase is Works Contract which is taxable under Notification No. 11/2017-Central Tax (Rate), dated 28.06.2017 under SAC 9954. Hence we have no hitch in providing the benefit of the Entry No. 23A ibid to the annuity payments i.e. road construction payments received after COD (during O&M phase). But this benefit does not come free.
- The above benefits comes with a rider that only 50% ITC of the GST paid on the Input and Input service used in the construction phase is available to the Appellant because annuity (50% of the construction payments) is not taxable and the appellant is not having any other non-business and/or exempted supply. The annuity payments (exempted supply) are to be taken into consideration for taking proportionate ITC during Construction leg of the project and not during O&M leg of the project. Full ITC of the tax paid on the inputs and input services used in the O&M phase is available to the Appellant if they are having no other outward supply during this phase.
Examination by GST council:- To clarify such haziness for the projects whose construction cost would be received in the form of the annuity, the GST council has examined the matter in its 43rd meeting held on 28/05/2021 & thereafter issues circular no. 150 dated 17/06/2021 wherein it is clearly said that the entry no. 23A was inserted under SAC 9967 covers “supporting services in transport” but the Services by way of construction of road fall under heading 9954. Consideration for construction of road service may be paid partially upfront and partially in deferred annual payments (and may be called annuities). Therefore, plain reading of entry 23A makes it clear that it does not cover construction of road services (falling under heading 9954), even if deferred payment is made by way of installments (annuities). Together the entries 23and 23A exempt access to road or bridge, whether the consideration are in the form of toll or annuity [heading 9967].