Taxability of Annuity payments under Build-Operate-Transfer (BOT) model: A Legislative History
1.0 What is BOT Annuity Model
The road projects in India are classified as Build-Operate-Transfer (‘BOT’) toll, BOT-Annuity, Engineering, Procurement and Construction (‘EPC’) and the Hybrid Annuity Model (‘HAM’).
The BOT Annuity model is a Public-Private Partnership (‘PPP’) model for infrastructure projects especially road projects. Under BOT annuity, a developer/Concessionaire builds the highway, operates it for a specified duration and transfers it back to the government. The government starts annuity payment to the Concessionaire after the launch of commercial operation of the project. Annuity payments are usually made half-annually. The national highway projects contracted out by National Highway Authority of India (‘NHAI’) under PPP model is a major example for the BOT model.
At the outset, let us understand the legislative history of taxability of annuity paid by NHAI/State Highways Construction Authority to Concessionaires for construction and Operation & Maintenance (‘O&M’) of roads/highways.
2.0 Pre-GST regime
Under the pre-GST regime, works contract services by way of construction of road for public use was exempt from service tax vide Mega-Exemption Notification No. 25/2012-Service Tax dated 20.06.2012.
3.0 GST regime
3.1 In the 22nd GST Council meeting held on 06.10.2017, the GST Council decided to recommend CBIC to exempt the annuity paid by NHAI and State authorities or State-owned development corporations for construction of roads to concessionaires for construction of public roads. Based on such recommendation, CBIC exempted such annuity payments, vide Notification 32/2017-Central Tax (Rate) dated 13.10.2017, by inserting Entry 23A to Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 (hereinafter referred to as “Exemption Notification”). Relevant extract is provided hereinbelow:
| Sl. No. | Tariff | Description of Services | Rate% | Condition |
| 23A | Heading 9967 | Service by way of access to a road or a bridge on payment of annuity. | Nil | Nil |
3.2 The taxability of annuity received in relation to construction of roads was challenged before the AAAR, Rajasthan in the case of Nagaur Mukundgarh Highways Pvt. Ltd. [2019 (23) G.S.T.L. 214] wherein it was observed and decided as follows:
- Annuity is an amount paid by the National & State Highways Construction Authorities to concessionaires for construction of roads in order that the concessionaire did not charge toll for access to a road or a bridge.
- The GST council in 22nd GST Council Meeting decided to treat annuity at par with toll and to exempt service by way of access to a road or bridge on payment of annuity from tax, and hence entry 23A was introduced.
- Whole project can be divided into two parts – one is construction phase and second is O&M phase
- Activity of appellant having nexus with annuity is classifiable under SAC 9967 and activity of appellant having nexus with construction payments during construction phase is Works Contract which is taxable under SAC 9954. Therefore, held that there is no hitch in providing the benefit of Entry no. 23A to the annuity payments in relation to the road construction received after construction during the O&M phase.
- Further held that only 50% ITC of the GST paid on the Input and Input Service used in construction phase is available to appellant since construction-related annuity payments, which was 50% of the construction payment, was an exempt supply and hence, proportionate ITC would be available during construction leg of project.
It is to be noted that insofar as exemption to annuities is concerned, the AAAR restricted itself to the construction-related annuity payments and did not discuss the taxability of annuity payments which are linked to O&M of the Project.
3.3 Post the foregoing ruling, representations were received by the GST Council from players engaged in Hybrid Annuity Model Project SPVs highlighting that this ruling prejudiced them inasmuch as it restricted ITC availment to a certain proportion owing to exemption on construction-related annuity payments and thereby adversely impacting their working capital and hence, putting them at a disadvantageous position vis-à-vis EPC and BOT Projects since ITC was fully available in such projects. The said issue was put up in the Agenda of the 43rd GST Council Meeting held on 28.05.2021 and it was decided by the GST Council that a clarification may be issued that annuity paid as deferred payment for construction of roads/highways was not exempted from GST as the annuity in lieu of tolls paid for access to road or bridge are. The justification of the Fitment Committee was as follows:
“Recommendation:
Clarification may be issued by way of a circular that entry 23A of notification No. 12/2017-CT(R) does not exempt annuity paid for construction of roads. It only exempts services provided by way of access to a road or bridge on payment of annuity for it.
1 The entry 23A of notification No. 12/2017-CT(R) provides exemption to any service provided for access of road on payment of annuity. This entry reads as below:
“Service by way of access to a road or a bridge on payment of annuity”.
2. However, the service being provided by the concessionaire to NHAI is construction service (for which the contract is entered into) covered under service code 995421 – General construction services of highways, streets, roads railways, airfield runways, bridges and tunnels.
3. The said entry 23A of the notification No. 12/2017-CT(R) exempts service by way of access to a road or a bridge on payment of annuity. Entry 23 exempts service of access provided in lieu of toll. However, cases where charges are paid, in lump sum or in form of an Annuity, by the Government department or PSU for seeking access to road/bridge for general public were not covered by entry 23. This led to a situation where the toll charges, in form of Annuity, being offset by the Government or PSU, in public interest, to the concessionaire were subjected to GST and consequently it was recommended by the GST Council in its 22nd meeting to exempt service by way of access to road or bridge where payment were in the form of annuity. The Council thus recommended exemption to only such annuities, which are charged for providing access to a road or bridge and otherwise the activity is at par with the activity for which toll is charged.
4.In the case referred to in the reference, AAAR vide its order dated 12.02.2019 had held that the annuity payments received by the petitioner are exempt, however, only 50% of ITC of the inputs and input services used in the construction phase shall be available to the petitioner as the annuity is not taxable. The AAAR did not go into the aspect that for the purposes of exemption annuity should have been in lieu of access to the road and not in lieu of construction of road.
5. It would be appropriate if clarification is issued that exemption is available to only such annuities, which are charged for providing access to a road or bridge (at par with toll). “
Therefore, the intention of the GST Council to issue such clarification was to provide benefit of exemption only to annuities linked to the O&M of the project and not in relation to the construction of the roads/highways.
3.4 To give effect to the aforesaid recommendations of the GST Council, CBIC issued Circular No. 150/06/2021-GST dated 17.06.2021 clarifying that Entry 23A of the Exemption Notification does not cover annuities by way of deferred payments in relation to construction of road services covered under SAC 9954 and only covers annuities paid in relation to operation services of the roads/highways covered under SAC 996742.
3.5 In light of the above, it becomes necessary to examine the scope of coverage of SAC 9954 and SAC 996742 insofar annuity payments are concerned. The relevant description of the services covered by the two SAC as given in the Scheme of Classification of Services are produced hereinbelow:
“Heading 9954 – Construction services
SAC 996742 – Operation services of national highways, state highways, expressways, roads and streets; bridges and tunnel operation services”
It is evident from the aforesaid SAC descriptions that Heading 9954 covers payments in relation to construction of the roads/highways, whereas SAC 996742 covers the annuity payments linked to the O&M of the road/highways.
4.0 Concluding remarks
It is apparent that the intent of CBIC is to provide benefit of GST exemption only on annuity payments linked to O&M services covered under SAC 996742 and not on annuity payments linked to construction services. GST at the rate of 12% would chargeable on annuity payments linked to construction services. Therefore, to optimize GST implications, it becomes necessary to examine and review the Concessionaire agreement entered between NHAI & Concessionaire to determine whether the Annuity payments received by the Concessionaires are in relation to construction of the road/highways of the Project or in relation to O&M services of the roads/highways.
Disclaimer: Views and Opinions expressed in the article are my personal and do not construe any suggestion or a professional or legal advice. The author can be reached at cajaybohra@gmail.com
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