18% GST payable on works contract service of constructing warehouse & cold storage for Govt. entity which will be rented out

In re Shree Constructions (GST AAR Telangana)

18% GST payable on works contract service of constructing warehouse & cold storage for Govt. entity which will be rented out

GST on contract for construction of ware house & cold storage by TSIICL

The Telangana State Authority of Advance Ruling (“the TSAAR”) in M/s Shree Constructions [TSAAR Order No.56/2022 dated December 8, 2022] held that rate of the Goods and Services Tax (“GST”) payable on works contract services for constructing warehouses, cold storage and godowns for Telangana State Industrial Infrastructure Corporation Limited (“TSIICL”), would be 18%.

Facts:

M/s Shree Constructions (“the Applicant”) is engaged in the business of works contracts. The Applicant entered into a contract with TSIICL for constructing warehouses and cold storage godowns for TSIICL, which would later be let out by TSIICL.

TSIICL is wholly owned by the Government of Telangana and therefore, the supply of works contract service would be to Government entity. In this regard, the Applicant sough advance ruling under Section 97 of the Central Goods and Services Tax Act, 2017 (“the CGST Act”) on the rate of tax applicable to supplies made to such Government entity.

Issue:

What would be the rate of tax on the supply of works contract to the government entity?

Held:

The TSAAR discussed and held as under:

• The contracts involved in the case overtly fall under Sr. No. 3(vi) of Notification No. 11/2017-Central Tax Rate dated June 28, 2017 (“Notification”) as the same is related to composite supply of works contracts. The said Notification was further amended by Notification No. 31/2017-Central Tax (Rate) dated October 13, 2017, through which the terms “Government Authority’ & ‘Government entity’ were inserted. Hence, making the TSIICL a government entity for the purpose of GST. The Notification provided concessional rate of 6% of CGST & SGST each to Government entities and Governmental Authorities.
• However, the concessional rate of 6% of CGST & SGST under the Notification was provided to Government entities and Governmental Authorities only if such construction is predominantly for use other than for commerce, industry or any other business or profession.
• In the present case, the contract is for construction of warehouse & cold storage and godowns, which would further be given on rent by TSCIIL. Therefore, concessional rate of tax is not applicable to the services provided by the Applicant. Also, vide Notification No. 15/2021 dated November 18, 2021 the phrase ‘Government Entity’ & ‘Government Authority’ were deleted from the Entry at Sr. No. 3(vi) of Notification.
• Thus, the works executed even for Government Entity or Government Authority will be taxable at rate of 9% CGST & SGST each.

Relevant Provisions:

Central Goods and Service Tax Act, 2017

Section 97: Application for advance ruling

(1) An applicant desirous of obtaining an advance ruling under this Chapter may make an application in such form and manner and accompanied by such fee as may be prescribed, stating the question on which the advance ruling is sought.

(2) The question on which the advance ruling is sought under this Act, shall be in respect of,–

(a) classification of any goods or services or both;

(b) applicability of a notification issued under the provisions of this Act;

(c) determination of time and value of supply of goods or services or both;

(d) admissibility of input tax credit of tax paid or deemed to have been paid;

(e) determination of the liability to pay tax on any goods or services or both;

(f) whether applicant is required to be registered;

(g) whether any particular thing done by the applicant with respect to any goods or services or both amounts to or results in a supply of goods or services or both, within the meaning of that term.

Central Goods and Service Tax Rules, 2017

Rule 104: Form and manner of application to the Authority for Advance Ruling-

(1) An application for obtaining an advance ruling under sub-section (1) of section 97 shall be made on the common portal in FORM GST ARA-01 and shall be accompanied by a fee of five thousand rupees, to be deposited in the manner specified in section 49.

(2) The application referred to in sub-rule (1), the verification contained therein and all the relevant documents accompanying such application shall be signed in the manner specified in rule 26

FULL TEXT OF THE ORDER OF AUTHORITY FOR ADVANCE RULING, TELANGANA

1.  M/s. Shree Constructions, 10-60/E, Shasthri Nagar, Near Razvi Chaman, Bommakal, Karimnagar, Telangana – 505 001 (36AJGPD3553L1Z5) has filed an application in FORM GST ARA-01 under Section 97(1) of TGST Act, 2017 read with Rule 104 of CGST/TGST Rules.

2. At the outset, it is made clear that the provisions of both the CGST Act and the TGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to any dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the TGST Act. Further, for the purposes of this Advance Ruling, the expression ‘GST Act’ would be a common reference to both CGST Act and TGST Act.

3. It is observed that the queries raised by the applicant fall within the ambit of Section 97 of the GST ACT. The Applicant enclosed copies of challans as proof of payment of Rs. 5,000/- for SGST and Rs. 5,000/- for CGST towards the fee for Advance Ruling. The Applicant has declared that the questions raised in the application have neither been decided by nor are pending before any authority under any provisions of the GST Act. The application is therefore, admitted.

4. BRIEF FACTS OF THE CASE:

4.1 Statement of relevant facts as per the applicant having a bearing on the question(s) on which Advance Ruling is required is reproduced below-

The applicant M/s. Shree Constructions are in the business of works contracts wherein they are executing construction of building on the land provided by the Telangana State Industrial Infrastructure Corporation Limited (TSIICL). The applicant is constructing ware houses and cold storage at primary processing centre in Jillela Village of Rajanna Siricilla District. The applicant also submitted that TSIICL will be letting out godowns for rent and that this amounts to business activity. The applicant submitted that the TSIICL is wholly owned by the Government of Telangana and therefore the supply of works contract service by them is to a Government entity. The applicant therefore seeks an advance ruling on the rate of tax applicable to supplies made to such Government entity.

4.2 Company Background:

The applicant M/s Shree Constructions doing works to Telangana State Industrial Infrastructure Corporation Limited (TSIICL) which is a State Government Entity. Telangana State Industrial Infrastructure Corporation Limited (TSIICL) is also known as TSIIC is a Telangana State Government Initiative for providing infrastructure through Development of Industrial area.

TSIICL was established in the year 2014 for identifying and developing potential growth centers in the Telangana State fully equipped with developed plots/sheds, roads, drainage, water, power and other infrastructural facilities; providing social infrastructure, like housing for workers near industrial zones, co-coordinating with the agencies concerned for providing communication, transport and other facilities. The corporation also has active projects in the Public-Private Partnership Mode.

5. QUESTIONS RAISED:

Q1. 1. The rate applicable for the works contract service provided to the Telangana State Industrial Infrastructure Corporation Limited (TSIICL) which is wholly owned by the Government of Telangana State by way of construction of building on their land. Whether it is 12% as the for Telangana State Industrial Infrastructure Corporation Limited (TSIICL) is wholly owned by the Government of Telangana or 18% as the for Telangana State Industrial Infrastructure Corporation Limited is a business entity and collecting rent for letting our Godown/Building from its customers.

6. APPLICANT’S INTERPRETATION OF THE LAW

It was stated that an advance ruling already pronounced by the AAR of similar business it was declared that the service provider has to collect GST@ 18% from the service receiver.

7. PERSONAL HEARING:

The Authorized representatives of the unit namely Sri. D Ramesh Kumar, CA & Authorized Representative attended the personal hearing held on 27.09.2022. The authorized representatives reiterated their averments in the application submitted and requested to dispose the case on merit basis.

8. DISCUSSION & FINDINGS:

The applicant entered into agreements with Telangana State Industrial Infrastructure Corporation Limited (TSIICL) for execution of contracts of buildings, warehouses, godowns since 2020. The TSIICL inturn letting out the godowns for its customers on rent. This amounts to use of the constructed premises for the purpose of business.

The contracts executed by TSIICL is a Government entity and to this organisations overtly fall under at S.No. 3(vi) of Notification No. 11/2017-Central Tax Rate dated June 28, 2017 which reads as follows:

“(vi) [Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, {other than that covered by items (i), (ia), (ib), (ic), (id), (ie) and (if) above provided to the Central Government, State Government, Union Territory, a loca l authority, a Governmental Authority or a Government Entity by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of –

(a) a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;

(b) a structure meant predominantly for use as (i) an educational,

(ii) a clinical, or (iii) an art or cultural establishment; or

(d)a residential complex predominantly meant for self-use or the use of their employees or other persons specified in paragraph 3 of the Schedule III of the Central Goods and Services Tax Act, 2017.

Provided that where the services are supplied to a Government Entity, they should have been procured by the said entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local authority, as the case may be.

Explanation.- For the purposes of this item, the term business‘ shall not include any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities.”

The terms ‘Government Authority’ & ‘Government entity’ were inserted as definition in notification No. 31/2017 – Central Tax (Rate) dt 13.10.2017 in Notification No. 11/2017 as clauses (ix) & (x) to explanation at Para 4 as follows:

(ix) Governmental Authority means an authority or a board or any other body, –

(i) Set up by an Act of Parliament or a State Legislature; or

(ii) Established by any Government, with 90 percent. or more participation by way of equity or control, to carry out any function entrusted to a Municipality under article 243 W of the Constitution or to a Panchayat under article 243 G of the Constitution.

(x) Government Entity means an authority or a board or any other body including a society, trust, corporation,-

(i) Set up by an Act of Parliament or State Legislature; or

(ii) Established by any Government, with 90per cent. or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.

In view of the above definitions Telangana State Tourism development corporation limited is a

Government entity. However the original Notification No. 11/2017 applied concessional rate of tax to Government Entities & Governmental Authorities @6% of CGST & SGST each only if such construction is predominantly for use other than for commerce, industry or any other business or profession.

As seen from the agreement contract, the contract is for “construction of ware house & cold storage at primary processing centre in Jillela Village, Tangalapally Mandal of Rajanna Sircilla District. Further, the applicant has also averred that these godowns will be given on rent by TSIICL. Therefore, the concessional rate of tax is not applicable to this transaction and tax payable will be 9% CGST & SGST each. Further, this entry was amended in Nov’ 2021 vide Notification No. 15/2021 dt. 18.11.2021 and the phrases ‘Government Entity’ & ‘Governmental Authority’ were deleted from the Entry at S.No. 3(vi) of Notification No. 11/2017 with effect from 01.01.2022. Thus the works executed even for the ‘Governmental Entity or ‘Government Authority’ will be taxable @9% CGST & SGST each.

9. In view of the foregoing, we rule as follows:

In view of the above discussion, the questions raised by the applicant are clarified as below:

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(Author can be reached at [email protected])