The Goods and Services Tax (GST) Council, in its 22nd meeting in October 2017 recommended tax exemption to “annuity paid by National Highways Authority of India (NHAI) and state authorities or state-owned development corporations to concessionaires for the construction of public roads”.
Surprisingly, the above recommendation was implemented by the government through notification no. 32/2017 – central tax (rate), by adding entry 23A to notification no. 9/2017 – integrated tax rate, which reads as: “Service by way of access to a road or a bridge on payment of annuity”. It mentioned “access to a road” as opposed to “construction of public roads”.
It is important here to understand that annuity in road projects are paid as a belated consideration for construction and not in return for services by way of access to a road as envisaged under entry 23A. That the exemption under entry 23A is not in relation to construction services becomes clearer when one notes that the four-digit service heading (under the scheme of classification of services under GST) referred to in entry 23A is heading 9967, pertaining to “supporting services in transport”, as opposed to heading 9954, which pertains to “construction services”.
If one refers to the explanatory notes to the scheme of classification of services, the heading 9967 includes “operation services of highways, roads, streets and causeways”. Again, “operation services” as opposed to “construction services”. Logically, operation services of highways also cover access to roads, as envisaged for exemption under entry 23A as opposed to construction. Clearly, the GST exemption to the concessionaires for the construction of roads as envisaged by the GST Council does not seem to have been implemented.
That the interpretation highlighted above is not merely a theoretical exposure but a highly probable consequence stands buttressed by the advance ruling from Rajasthan in the case of Nagaur Mukangarh Highways Pvt Ltd. The key points from which are:
- The applicant was engaged as a “concessionaire” by the Government of Rajasthan’s Public Works Department to construct, operate and maintain the project during the construction period, which would commence from the appointed date and end on the commercial operation date (COD), and operate and maintain it for a period of 10 years from the COD.
- The applicant would receive 50% of the cost of construction, which was to be paid to the applicant in five equal installments during the construction period on the basis of achievement of milestones. Further, the applicant would receive the remaining 50% in biannual installments over the operation and maintenance (O&M) period along with the interest (annuity payments). The applicant would also receive biannual payments towards O& M expenses calculated at a specified percentage of the construction cost during the O&M period.
- The applicant contended that the annuity payments during the O&M period are exempted under entry no. 23A of the notification no. 12/2017-CT (rate). The Advance Ruling Authority rejected the applicant’s contention as entry 23A pertains to heading 9967, which is for support services of transport services whereas the services provided by the applicant is classifiable under heading 9954 (construction services) that is liable to GST as a “works contract” at the applicable rate of GST.
- The Advance Ruling Authority went on to clarify that the applicant is liable to pay the applicable GST on the full 100% of the construction cost (including future annuity payments during O&M period) of the project during the initial construction period of two years, at the time of issue of invoices or receipt of the payment, whichever is earlier.
Thus, it appears, that a clear recommendation of the GST Council for exemption to annuity payments for construction of roads has been disregarded by the government while implementing the recommendation in the form of a notification. This is prima facie vulnerable to a constitutional challenge through a writ petition. This would be an interesting court room battle as it will settle the fundamental question – can the government go against a clear recommendation of the GST Council, of which it is a member?
Further, this inconsistency may also lead to contractual disputes due to “change in law” claims on account of GST between concessionaires and NHAI or other nodal agencies.
Sudipta Bhattacharjee is a partner in the tax controversy management and contract documentation practice of Advaita Legal.
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