The Central and State Governments have been continuously taking preventive measures in its mission to contain the spread of novel Corona Virus (COVID-19). Several important measures have been adopted to fight with COVID-19 and self-quarantine appeared to be one of the best solutions among others. In its endeavor to save its citizens from getting infected, the Government arranged Isolation/Quarantine Centers across the country by taking mandatory possession of the hotels, inns etc. People with foreign travel history or diagnosed patients were being kept there as per the directions of the Government.
As the hotel and inn premises were in control of the Government, the owners of such premises have suffered substantial losses. The recurring expenses such as electricity bills, water bills, employees’ salary etc. were incurring without any earnings to the owners. Due to which the owners might file compensation claims in lieu of losing their revenue and for reimbursing the expenses incurred during the period in which the premises were in Government’s possession.
In the above backdrop, the question arises as to whether GST would be levied on the compensation claims tend to be filed by the owners of the premises. Let us understand the provisions of Central Goods and Services Tax Act, 2017 (for brevity, “CGST Act”) to examine its GST implications.
As per Section 9 of the CGST Act, tax shall be levied on ‘supplies’ of goods or services or both on the value determined under Section 15 at such rates as may be notified by the Government. In order to cover a transaction in the ambit of GST law, at the outset it must qualify as ‘supply’. The scope of supply is defined in Section 7 of the CGST Act in an inclusive manner. The relevant extract of the provision is as under:
7(1) For the purposes of this Act, the expression “supply” includes––
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business… ;
The above definition is an inclusive definition and possess widest possible connotation. However, all the aforementioned transaction types, i.e. sale, transfer, barter, exchange, licence, rental, lease or disposal would primarily require consensus ad idem between the parties to the contract. Further, there must be a ‘consideration’ agreed by both the parties to the contract (except in certain cases specified in Schedule I to the CGST Act).
In the instant case, the State Government issued an order to acquire the possession of the hotel and inn premises for using them as Quarantine Centers to prevent the spread of contagious COVID-19. The owners of the said premises were obliged to follow the Order issued by the State authorities. It is merely abiding by the instructions issued by the Government which does not require any consensus of the owners of the premises. Hence, in the absence of the consensus of the premises’ owners, acquiring control or possession of premises by the Government cannot be termed as ‘supply’ by the owners of the premises.
Further, it is to be highlighted that no consideration has been offered by the Government for acquiring the possession of hotels and inns. It is the owner of the premises who would be seeking ‘compensation’ for its loss of revenue and expenses incurred.
It is pertinent to note that the term ‘compensation’ varies from the term ‘consideration’ as consideration is received in lieu of provision of service rendered or sale of goods, whereas ‘compensation’ is a claim in relation to the losses or expenses incurred/suffered by the person while performing any activity for other person.
Basis the above legal background, it can be construed that the activity of Government taking mandatory control and possession of the Hotel and inn premises would not be considered as ‘supply’ and no GST implications would arise on the compensation to be received by the owners of such premises.
Having said that the instant transaction would not be covered under the scope of supply, however, department may still have a different opinion and would treat it as ‘supply’. In that case, assuming that the instant transaction is a supply, we would require to again deep dive into the Law to assess whether it would be exigible to GST. It would be pertinent to examine the Notification no. 12/2017- Central Tax (Rate) dated 28th June, 2017 which enlist the services exempted from GST leviable thereon. Serial No. 3 of the said Notification is reproduced hereunder:
“Pure services (excluding works contract service or other composite supplies involving supply of any goods) provided to the Central Government, State Government or Union territory or local authority or a Governmental authority [or a Government Entity] by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution.”
Article 243W of the Constitution is as under:
“243W. Powers, authority and responsibilities of Municipalities, etc.
Subject to the provisions of this Constitution, the Legislature of a State may, by law, endow
(a) the Municipalities with such powers and authority as may be necessary to enable them to function as institutions of self government and such law may contain provisions for the devolution of powers and responsibilities upon Municipalities, subject to such conditions as may be specified therein, with respect to
(i) the preparation of plans for economic development and social justice;
(ii) the performance of functions and the implementation of schemes as may be entrusted to them including those in relation to the matters listed in the Twelfth Schedule;
(b) the Committees with such powers and authority as may be necessary to enable them to carry out the responsibilities conferred upon them including those in relation to the matters listed in the Twelfth Schedule”
Further, the relevant extract of the matters listed in Twelfth Schedule as mentioned in the above Article 243W is as below:
“TWELFTH SHEDULE (Article 243- W)
1. Urban planning including town planning.
2. Regulation of land use and construction of buildings.
3. Planning for economic and social development.
4. Roads and bridges.
5. Water supply for domestic, industrial and commercial purposes.
6. Public health, sanitation conservancy and solid waste management,
On perusal of the above clauses, the service of providing hotel and inn premises for Quarantine Centers to the Government can be inferred as service provided to the Government for carrying out its ‘Public health’ functions entrusted under Article 243W of the Constitution of India. Accordingly, the instant scenario would be squarely covered in the aforementioned exempted service category and would not be exigible to GST.
Hence, basis the above discussion it can be concluded that the mandatory acquisition of hotel premises for creating Isolation Centers would not be regarded as supply. Even if it is contended that it is a ‘supply’, it would be exempted vide S. No. 3 of the Exemption Notification being service in relation to a function entrusted under article 243W of the Constitution. Therefore, the compensation to be received from the Government would not be exigible to GST in the hands of the owners of hotels and inns.
The above views have been expressed only to give an insight about the legal position under GST law. No opinion has been given upon the legitimacy, quantum and acceptance of the Compensation claims. Such views are based upon my own interpretation of the legal provisions. A different view may be taken by other professionals and the department.
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