India has the second-largest road network in the world, spanning a total of 62.16 Lakhs kilometres (kms). This comprises National Highways, Expressways, State Highways, District Roads and Village Roads. Historically, investments in the transport sector have been made by the Government. However, in order to encourage private sector participation, the Ministry has laid down comprehensive policy guidelines for private sector participation in the development of National Highways also known as the Public Private Participation system (hereinafter referred as PPP system).
Recently, the GST council in its 43rd meeting dated 28th May 2021 has recommended to issue a clarification on applicability of GST on annuity payments received as deferred payment for construction of road. Benefit of the exemption is for such annuities which are paid for the service by way of access to a road or a bridge.
By this article, an attempt has been made to explain the need for issuing such clarification by the GST council. But before we discuss the GST implications related to the issue in hand, let’s first understand the operative functioning models through which the National Highways Authority of India (NHAI) implements the highway construction projects under the PPP system to enable the readers get a better understanding of the issue.
Methods of project implementation under the PPP System
1. Build-Operate-Transfer (BOT) – Toll
Under this model, the government enters into a concession contract with a private player and the private player (hereinafter referred as the Concessionaire) is responsible for financing, constructing, operating and maintaining the road facility for a specific period of time usually the concession period of time. After the concession period is over, the project ownership is transferred to the Government. A grant is also released by the government to the concessionaire to bridge the gap between investment required and gains arising out of the project and increase the viability of the project. The main source of revenue from the project is the toll collection by the concessionaire from the ultimate users of the road during the concession period.
2. Build-Operate-Transfer (BOT) – Annuity
Similar to the BOT-toll, the concessionaire is responsible for financing, constructing, operating and maintaining the road facility for a specific period of time usually the concession period of time. After the concession period is over, the project ownership is transferred to the Government. Under this model, the main revenue for the concessionaire is the periodic annuity payment received from the government which is used to meet the contractual obligations including operational and maintenance expenses and servicing debt obligations. Unlike the BOT – Toll method, toll collection will be made by the government itself.
3. Hybrid Annuity Model (HAM)
This method is a hybrid model of BOT and EPC contracts. The concessionaire under this model is responsible for financing 60% of the project cost upfront and the balance 40% is provided by the Government during the construction period in five equal instalments linked to project milestones achievement. The remaining 60% project cost which is financed by the concessionaire is provided by the Government as semi-annual annuity payments over the operations and maintenance period along with interest thereon to the concessionaire. Like BOT model, the concessionaire constructs the project, operates and maintains the project for concession period and then transfer it to the Government. Toll collection is the responsibility of the government. Apart from the project costs, the Government also provides Operations and maintenance costs to the concessionaire during the O&M period.
Rise of the confusion
1. GST council in its 22nd meeting held on 06th Oct 2017 has decided to provide exemption from GST on annuity paid by NHAI (and State authorities and State-owned development corporations for construction of roads) to concessionaires for construction of public roads. The same is evident from the S.no. 13(iv) of the Agenda, CBEC press release and Signed minutes of the meeting. Relevant extract of the minutes of the 22nd meeting is as under –
“Agenda item 13(iv): Issue of Annuity being given in Place of Toll Charges to Developers of Public Infrastructure – exemption thereon
1. Introducing this Agenda item, the Joint Secretary (TRU-Il), CBEC stated that while toll is a payment made by the users of road to concessionaires for usage of roads, 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. He stated that construction of roads was now subject to tax at the rate of 12% and due to this, there was free flow of input tax credit from EPC (Engineering, Procurement and Construction) contractor to the concessionaires and thereafter to NHAI. He stated that as a result, tax at the rate of 12% leviable on the service of road construction provided by concessionaire to NHA1 would be paid partly from the input tax credit available with them. He 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 to also cover under this provision annuity paid by State-owned Corporations. After discussion, the Council decided to treat annuity at par with toll and to exempt from tax, service by way of access to a road or bridge on payment of annuity.”
After visiting the agenda and minutes of the meetings as reproduced above, we find that toll payment is a fee paid by the user of the road for usage of the roads, and annuity is an amount paid by NHAI to concessionaires for construction of roads in order that the concessionaire did not charge toll for access to a road or a bridge. Service by way of access to road or a bridge on payment of toll is already exempt from GST vide entry no. 23 of the exemption notification no. 12/2017 – Central tax (Rate). The council has decided to treat annuity paid by NHAI during the O & M phase to the concessionaire at par with toll and to exempt from tax service by way of access to road or bridge on payment of annuity.
Following this decision of the council, entry no. 23A was inserted in the original exemption notification through N.N. 32/2017-Central tax (rate) dt. 13/10/2017, which was introduced under heading 9967 and provided exemption to service by way of access to a road or a bridge on payment of annuity.
2. Discrepancy in the recommendations made by the GST council and the exemption entry 23A issued in this regard complicated the entire issue concerning GST on annuity payments received under HAM. Council recommended exemption from GST on annuity received for construction of roads, but the Central government issued notification to provide exemption on annuity received for services provided by way of access to road or bridge. The entry in the exemption notification was introduced under the heading 9967 which covers “Operation services of national highways, state highways, expressways, road and bridges” and not under heading 9954 which covers the services of construction of roads.
3. Relying on the recommendations made by the council, the construction industry adopted the view to treat annuity payments received during the O & M phase as exempt from GST, emphasising that the exemption vide entry no. 23A is defeating the intent of the law. Further, Ministry of Road Transport and Highways (Planning Zone) has issued SOPs vide circular no. RW/G-20017 /26/2018-W&A dt. 19/11/2018 for implementation of GST provisions, which has specifically mentioned that no payment against GST shall be made on Annuity payments. Relevant extract reproduced below –
“8. Payments for Hybrid Annuity Projects (40% of Bid Project Cost), O&M Contracts and Bonus for Early completion:
(i) Keeping in view the clarifications issued by the Ministry of Finance (Deptt. Of Revenue) vide notification no. 33/2017, dated 13.10.2017on Integrated Tax (Rate) that “Service by way of access to a road or a bridge on payment of annuity – applicable GST is NIL (Sl. No. 24A, Heading9967)”, no payment against GST shall be made on Annuity payments.”
4. The issue was further complicated by the Rajasthan Appellate Authority of Advance Ruling in the matter of M/s Nagaur Mukundgarh Highways Pvt Ltd, wherein it was held that although the Annuity payments received by the concessionaire during the O & M phase are exempt in lieu of entry no. 23a of the exemption notification, but the concessionaire has to reverse proportionate 50% of the ITC availed during the construction phase under rule 42 of the CGST rules on account of exempt annuity payments received during O & M phase. Although the advance ruling is binding on the applicant only, but this ruling had opened a pandora’s box of litigation.
Clarification issued in 43rd Council meeting
The issue of applicability of GST on annuity payments for construction of roads has been set to rest by the GST council in its 43rd meeting on 28th May 2021. It has been clarified that GST is applicable on the annuity payments received as deferred payment for construction of road. Benefit of the exemption is for such annuities which are paid for the service by way of access to a road or a bridge.
Although whether the change will be applicable prospectively or retrospectively has not been specified yet by the council, but this change has been brought in as a clarification, the department might be implementing it on a retrospective basis. Whether this clarification has brought an end to multiple litigations or has raised some fresh ones, we’ll get to know in the upcoming times.
GST Rates on Services
Decisions taken by the GST Council in the 22nd meeting held on 6th October 2017
The following decisions were taken by the GST Council at its 22nd meeting held in Vigyan Bhavan on 6th October, 2017. The information is being uploaded immediately after the GST Council’s decision and it will be subject to further vetting during which the list may undergo some changes. The decisions of the GST Council are being communicated for general information and will be given effect to through gazette notifications which shall have force of law.
Relief to small units:
1. GST rates on job work services is being rationalised as follows:-
|S.No||Description of Service||Rate|
|1||Job work services in relation to all products falling in Chapter 71 (including imitation jewellery)||5%|
|2||Job work services in relation to food and food products falling under Chapters 1 to 22 of the HS Code (except packing of processed milk into packets)||5%|
|3||Job work services in relation to products falling under Chapters 23 of the HS Code except dog and cat food put up for retail sale (CTH 23091000)||5%|
|4||Job work in relation to manufacture of umbrella||12%|
|5||Job work in relation to manufacture of clay bricks falling under CTH 69010010||5%|
|6||Services by way of printing on job work basis or on goods belonging to others in relation to printing of all goods falling under Chapter 48 or 49, which attract GST @ 5% or Nil [Heading 9988]||5%|
|7||Services by way of printing on job work basis or on goods belonging to others in relation to printing of all goods falling under Chapter 48 or 49, which attract GST @ 12% [Heading 9988]||12%|
|8||Services by way of printing on job work basis or on goods belonging to others in relation to printing of goods falling under Chapter 48 or 49, other than those covered by (6) and (7) above, [Heading 9988]||18%|
|9||Services by way of printing in relation to printing of all goods falling under Chapter 48 or 49, which attract GST @ 5% or Nil, where only content is supplied by the publisher and the physical inputs including paper used for printing belong to the printer [(Heading 9989)]||12%|
|10||Services by way of printing of all goods falling under Chapter 48 or 49 which attract GST @12%, where only content is supplied by the publisher and the physical inputs including paper used for printing belong to the printer||12%|
|11||Services by way of printing of all goods falling under Chapter 48 or 49 which attract GST @18% or above, where only content is supplied by the publisher and the physical inputs including paper used for printing belong to the printer||18%|
|12||To issue a clarification with regard to classification of printing products/services.|
2. If a dealer who makes supplies of goods and services referred to in clause (b) of paragraph 6 of Schedule II of CGST Act and /or also receives interest income or makes supply of any exempt service, (s)he will not be ineligible for the Composition Scheme under Section 10 provided all other conditions are met. Further, in computing his aggregate turnover in order to determine his eligibility for composition scheme, interest income and value of supply of any exempt servicesshall not be taken into account. Removal of Difficulty order under section 172 of CGST/SGST/UTGST Act will be issued.
3. The services provided by a GTA to an unregistered person (under GST law) including unregistered casual taxable person other than the recipients liable to pay tax on GTAservices under reverse charge shall be exempted from GST.
4.1 Leasing of vehicles purchased and leased prior to 1.7.2017, shall be taxed at 65% of the applicable GST + Cess rate. This reduced rate would be applicable for a period of 3 years with effect from 1st July 2017;
4.2 The vehicles covered by the above leases (i.e. leases of vehicles purchased and leased prior to 1.7.2017), when disposed off/ sold shall also be taxed at 65% of the applicable GST + Cess rate. This reduced rate would be applicable for a period of 3 years with effect from 1st July 2017;
4.3 Sale/supply of vehicles by a registered person, who had procured the vehicle prior to 1st July 2017 and has not availed input tax credit of central excise duty, VAT or any other taxes paid on such vehicles, would be taxed at 65% of the applicable GST + Cess rate. This reduced rate would be applicable for a period of 3 years with effect from 1st July 2017.
4.4 Sale by way of auction etc. of used vehicles, seized and confiscated goods, scrap etc by Central Government, State Government, Union Territory or a local authority, to any person, to be subjected to GST under reverse charge under section 9 (3) of the CGST Act.
5. Transport of passengers by motor cab/ renting of motor cab:-
(i) GST of 5% without ITC and 12% with full ITC available to transport of passengers by motor cab/ renting of motor cab shall be extended to any motor vehicle;
(ii) ITC of input services shall be allowed in the same line of business at GST rate of 5%
Other rate changes in services:
1. Works contract services involving predominantly earth works (that is, constituting more than 75% of the value of the works contract) supplied to Central Government, State Governments, Local Authority, Governmental Authority or Government Entity shall be taxed at 5%.
2. To expand the existing definition of Governmental Authorityso as to include any authority set up to carry out any functions entrusted to a Panchayat under Article 243G of the Constitution.
3. Supply of service or goods by a Government Entity to Central Government, State Government, Union Territory, Local Authority or any person specified by them againstconsideration received from them in the form of grants, shall be exempted. “Government Entity” shall be defined as an authority or a board or any other body including a society, trust, corporation which is, –
(i) set up by an Act of Parliament or State Legislature, or
(ii) established by any government,
with 90% or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government or a local authority.
4. The reduced rate of 12% on specified works contract services supplied to the Central Government, State Government, Union Territory, Local Authority and Governmental Authority shall be extended to a Government Entity, where such specified works contract services have been procured by the government entity in relation to the work entrusted to it by the Central Government, State Government, Union Territory or Local Authority.
5. GST shall be levied @ 12% on works contract services in respect of offshore works contract relating to oil and gas exploration and production (E&P) in the offshore area beyond 12 nautical miles.
6. GST shall be levied @ 12% with ITC or 5% without ITC for transportation of natural gas through pipeline.
7. Exemption to annuity paid by NHAI (and State authorities or State owned development corporations for construction of roads) to concessionaires for construction of public roads.
8. Upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable in respect of service, by way of granting of long term lease of thirty years, or more) of industrial plots or plots for development of infrastructure for financial business, provided by the State Government Industrial Development Corporations/ Undertakings or any other entity having 50% or more ownership of Central Government, State Government, Union Territory to (a) industrial units or (b) developers in any industrial or financial business area, may be exempted from GST .
9. The services provided by Overseeing Committee members to RBI shall be taxed under the reverse charge mechanism under section 9(3) of the CGST Act, 2017.
10. Some other technical changes/amendments shall be made in notifications issued under CGST, IGST, UTGST and SGST Acts.