Analysis Of Provisions Related To GST Exemption On Pure Services To Government
This write up is an analysis of GST exemption on pure services provided by registered taxable person to Government. Since services to government needs special attention of the service providers, it is our endeavour to highlight some areas which needs to be examined before treating the services as exempted under the serial no. 3 of notification no. 12/2017 i.e. for pure services. In this write up, we have covered following areas:
Exemption on pure services to Government:
The Notification No. 12/2017- Central Tax (Rate) dated 28 June 2017, notifies the services which are exempted from levy of GST.
The serial no. 3 of exemption notification provides that
“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 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.”
Any supply which is either deemed as services under Schedule II of CGST Act or which are not covered under the definition of goods shall be categorized as pure services. However, as per the notification, works contract services or other composite supplies involving supply of any goods are not covered in serial no. 3. Though, services in the nature of original works to Government is exempted vide serial no. 10 and 11.
Conditions of exemption:
As per the entry no. 3 of notification no 12/2017 – Central Tax (Rates) dated 28 June 2017 as amended by notification no. 02/2018 dated 25 January 2018, following are the 3 foremost conditions to be qualified for exemption:
Government defined as ?
This is the straight question that who will be defined as Government. Central Government, State Government, Local Authority, Union Territory shall be treated as eligible recipient for exemption under entry no. 3. Now the point is, what is the definition of Governmental authority or Government entity?
Governmental entity is defined in Notification no. 31/2017-Central Tax (Rate) dated 13 October 2017 as
“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 90 per 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”
Therefore, after reading above definition, an entity set up by an Act of Parliament or State legislature shall be deemed to be a Government entity for the purpose of exemption under serial no. 3 of N/N 12/2017.
Further, if an entity is established with more than 90% shareholding or control by any Government, then also such entity shall be qualified for exemption under said serial number.
Now here is the catch point. Shareholding of more than 90% or control by any Government means what. This means, if any entity is SPV of any Government (State Government or Central Government) with shareholding or control of more than 90%, then such entity shall be Governmental authority or Government entity. For example, smart city SPVs can be categorized as Government entities if it qualifies above shareholding patters.
REVERSAL OF RELATABLE INPUT TAX CREDIT (ITC)
The input tax credit attributable to inputs/input services/capital goods used for providing exempted output supplies are not eligible input tax credit hence subject to be reversed, if availed. Even in case of receipt of common supply of input/input service/capital goods, the proportionate input tax credit shall be calculated and reversed on monthly basis. The reversal of input tax credit shall be done as per the following method. Please refer the illustration for more clarification:
|1||Total input tax||T||1,00,000|
|2||Supply excl. used for other than business purpose||T1||5,000|
|3||Supply excl. used for effecting exempted supply||T2||5,000|
|4||Blocked credit u/s 17(5)||T3||10,000|
|Balance credit||C1 = (T-(T1+T2+T3)||80,000|
|5||Supply excl. used for taxable supplies incl. zero rated||T4||60,000|
|Common credit||C2 (C1-T4)||20,000|
|6||Credit attributable to exempt supply||D1*||2,000|
|7||Reversal pertains to non-business purpose use of inputs/input services||D2#||1,000|
E=Aggregate value of exempt supplies for tax period = 2,00,000
F=Total turnover in the State during the tax period = 20,00,000
#D2=C2*5% (IF COMMON INPUTS AND INPUT SERVICES ARE USED PARTLY FOR BUSINESS AND PARTLY FOR NON-BUSINESS PURPOSE
This has to be noted that above reversal of input tax credit will increase the cost to the supplier of pure service. Also, the reversal of input tax credit shall be done on monthly basis on the basis of previous tax period turnover (E/F). At the end of financial year, the supplier has to recalculate the reversal and any short reversal of input tax credit shall be corrected/reversed not later than in the return for the month of September of following financial year.
IT HAS IMPACT ON COSTING TOO!!!
Please note that any person engaged in providing exempted supply of services are required to consider the cost of input tax credit which shall be reversed to output exempt supply.
Illustratively, where the supplier is engaged in supply of eligible pure services to government entities which are exempt amounting to Rs. 2,00,00,000 and sub-contracted the assignment to another company for Rs. 1,80,00,000 (plus GST @ 18%). Then the cost to the supplier shall be Rs. 2,12,40,000 instead of Rs. 1,80,00,000 because the GST charged by the sub-contractor shall not be allowed as input tax credit to the supplier.
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. The observations of the authors are personal view and this cannot be quoted before any authority without the written permission of the authors. This article is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this article will be accepted by authors. It is recommended that professional advice be sought based on the specific facts and circumstances. This article does not substitute the need to refer to the original pronouncements on GST.
(Authors – CA Neeraj Kumar and CA Deepak Arya, RAPG & Co. Chartered Accountants based out in Gurugram & Delhi and can be reached at firstname.lastname@example.org, 9999836182/9818449179)