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With increasing involvement of private partnership in infrastructure projects many business models has been framed under the PPP System like Build-Operate-Transfer (BOT) – Toll, Build-Operate-Transfer (BOT) – Annuity, Hybrid Annuity Model (HAM) etc.. Under these models private firms takes huge financial risk since these types of business models requires huge/heavy investments and also plucks with considerable amount of taxes (i.e Direct & Indirect Tax). Since GST applicability under this model remains a grey area as little clarity has been provided by the GST Authorities. As in these models Firms invest huge amount and as a return to their investment they get Annuity, Toll. The Annuity /Toll may receive during construction phase (Usually called ‘Upfront Payment’) or after completion of the project (Usually Called ‘Post Payment’).

Treatment Of Amounts Received During Construction Period :-

Although such amounts are in the nature of grants/ subsidy provided by the government, the same is treated as construction-linked revenue /Income and taxable under GST in the absence of any specific exemption. The point of difference here to be noted that the underlying nature of these payments is similar to grants / subsidy is received under the conventional BOT model which is not taxable under GST which is applicable for entire contract/BOT project (In short one can’t isolate this income). Accordingly, treating them as taxable is not in line with government’s intention in relation to PPP Projects.

Earlier as per Notification No. 12/2017- Central Tax (Rate) dtd. 28th June, 2017; GST Rate will be ‘Nil’ for ‘Service by way of access to a road or a bridge on payment of toll charges’.

Later on it is further clarified by Notification No. 32/2017- Central Tax (Rate) dtd. 13th October, 2017; as ‘Any Service by way of access to a road or a bridge on payment of annuity’.

(Here point to be noted that before clarificatory notification Annuity is taxable & only Toll charges were exempt from GST).

Accordingly Toll Charges as well as annuity payments are exempt from GST. Which is also confirmed by the Appellate Advance Ruling Authority, Rajasthan in case of Nagaur Mukundgarh Highways Pvt. Ltd. 2019 (23) .

Another point is to be noted that typically there are two phases in these types of models:

  • Construction/ Development of Highway/ Road and
  • Operation Part.

In the Notification it has been clearly mentioned that ‘Service by access to road’  is ‘Nil’. Here one need to understand ‘Access to road’ can be granted only after completion of entire Road project. Many times while Construction/ Development phase some part annuity / consideration is received by the concessionaire. Due to silence in the notification this may lead as taxable turnover in hands of concessionaire.

Pandora’s box of Input Tax Credit:-

Here two sets need to understand which are as follows:

1. Section 17(2) of CGST Act, 2017 – Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

2. Section 17(2) of CGST Act, 2017 – Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:—



(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business

We all know ITC forms the essence of GST ensuring that tax is levied only on the value additions made by the supplier of goods and services means ITC will be eligible only if Output is applicable. Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply. ITC on goods and services in relation to construction services has been disallowed as per Section 17(5)(c) & (d) of CGST Act, 2017. However, this restriction is in respect of construction of immovable property and not for works contract service. Accordingly, ITC of GST paid on input and input services utilized by the concessionaire is available since the work involved under HAM qualifies as works contract services as discussed in earlier para it is taxable.

However, as per Section 17(2) of the CGST Act, 2017, the concessionaire should reverse the ITC attributable against the receipt of annuity which is an exempt supply. In this regard going by plain interpretation of Rule 42 of the CGST Rules, 2017, ITC attributable to commonly used inputs and input services is required to be reversed basis the ratio of exempted Services (Annuity Receipt) and taxable supplies (Any Receipts other than Annity).

The above ITC modality has been discussed & pronounced in case of Nagaur Mukundgarh Highway the Appellate Authority of Advance Ruling has held that the applicant is not eligible to claim full ITC of goods and services for Operation Part. The Dealer should reverse the proportionate ITC pertaining to annuity payments and ITC can be claimed for taxable supplies explicitly.

Note :-

The Notification & Advance ruling has already created chaos and may wreck the PPP models due to Output GST liability for Annuity received during Construction/ Development phase and non-availability of ITC under Section 17(5)(c) & (d) of GST Act, 2017 and Rule 42 & 43 under CGST Rules for Post Construction phase.

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