India has a vast network of road network of 5.23 million kms. and categorically it is the world’s second largest network . The national Highway comprises 2% of the total road network but carry 40% of the total traffic . One more interesting fact is that the 65% of the freight and 80% of the passenger traffic is carried by the roads . This clearly indicates the importance of road infrastructure in the overall development of the economy as well as the country . That is why the government has taken the development of infrastructure in the roads in its high priority agenda . The National Highway Development Program is among the largest road development program of the world.
GST Chargeability on Roads / Highways :
Before going into the discussion of the GST chargeability on the roads / highways we have to understand some basic facts that the how the overall model works . In India The development of National Highways is the responsibility of the government of India . The Parliament of India has passed the act called National Highways Act,1956 in this regard . While going through the act section 4 vests the ownership of all national highways in the Union of India . The bare act language of section 4 is
“National highways to vest in the Union.—All national highways shall vest in the Union, and for the purposes of this Act “highways” include—
(i) all lands appurtenant thereto, whether demarcated or not;
(ii) all bridges, culverts, tunnels, causeways, carriageways and other structures constructed on or across such highways; and
(iii) all fences, trees, posts and boundary, furlong and milestones of such highways or any land appurtenant to such highways.”
Thus one thing is very much clear that the whatever be the model of the development of roads / highways , the ownership of the national highways remain vested with the government of india .
The development of the National Highways is primarily entrusted with the nodal authority created by the Parliament vide National Highway Authority of India Act, 1988 under the Ministry Of Road Transport & Highways, Government of India . The Union of India has through the section 11 of the NHAI Act ,1988 parts with the right of National Highways with the NHAI. The extract of Section 11 is :
“ Power of the Central Government to vest or entrust any national highway in the Authority.—The Central Government may, from time to time, by notification in the Official Gazette, vest in, or entrust to, the Authority, such national highway or any stretch thereof as may be specified in such notification.”
Thus with the above it is clear that the property in roads vest with the union of India .
Different Models in Road /Highway Projects :
The government is now for the faster development of the road infrastructure has taken the route of the Public Private Partnership (hereinafter called PPP). In PPP different types of the model is operating and prominent ones are discussed hereinafter.
BOT-Toll (PPP): The BOT stands for the Build Operate and Transfer. In this type of the model a concession agreement is entered into between the NHAI and Private developer/ operator ( concessionaire) in which the concessionaire is responsible for the designing , building, financing , operating and transferring the project at the end of the concession period. In this types of the model the government generally made the provision of VGF (Viability Gap Funding) to make the venture economically viable for the concessionaire . The concessionaire receives the commercial returns in the nature of toll revenue at the government regulated rates. Also the commercial risk pertains to the concessionaire .
BOT- Annuity (PPP) : The concessionaire is responsible for the designing , building, financing , operating and transferring the project at the end of the concession period. The financial returns to the concessionaire through predetermined semi annual annuity payments made by then government . In this model the government is responsible for collecting toll revenue and the commercial risk is not transferrable to the concessionaire .
Operate, Maintain and Transfer (OMT) Concession : NHAI has recently taken up award of select highway projects to private sector players under an OMT Concession. Till recently, the tasks of toll collection and highway maintenance were entrusted with tolling agents/ operators and subcontractors, respectively. These tasks have been integrated under the OMT concession. Under the concession private operators would be eligible to collect tolls on these stretches for maintaining highways and providing essential services (such as emergency/ safety services).
Hybrid Annuity Model : Concessionaire responsible for Designing, Building, Financing (60% of the Project Cost),Operating and Transferring the project at end of concession period. Recovery of 60% of Project Cost through bi-annual annuity payments and separate market linked interest payment on reducing balance method . In addition, provisions for separate O&M payments . The payments are inflation indexed.
Concessionaire receives Construction Support of 40% of Project Cost in five equal investments. Toll collection to be the responsibility of the Authority
Operation and Maintenance Contracts : Such types of the contract is generally awarded by the NHAI in the nature of composite supply of service. In such type of contracts the principal supply would depend upon contarct to contract basis . If the principal supply is the operation of the highway then it will be termed as the same and will not be in the nature of the work contract.
Further if the principal supply of the contract is the repair and maintenance then it will be work contract and accordingly provisions of the GST will apply to the same .
Taxability of Financial returns received under the above mentioned models under GST provisions :
While we have already made the discussion in the preceding paragraphs that the ownership with regard to the property in roads vests in the union of India , thus we can clearly can say that in all the models ,the concessionaire only gives the services of work contract as mentioned under Schedule II clause 6 of the CGST Act. Various courts in india also upheld the validity of the this notion of treating the projects of the BOT as work contract. In this regard we can make reference the one of the important judgment of M/s Ashoka Infrastructures Vs State of Maharashtra (2014-VIL-12-MSTT) in which court has held that the contract awarded under BOT model will be considered as work contract and thus chargeable to erstwhile Maharashtra State VAT Laws. In this judgement tribunal has beautifully explained why the BOT projects are categorized as work contracts .
The payment of annuity by the NHAI to the concessionaire will ordinarily termed as supply and will be charged to the GST.
One surprising fact is that the GST council in is 22nd meeting dated 06.10.2017 has made recommendation regarding the GST 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 .” However the above recommendation was implemented by the government through notification No. 32/2017, C.T.(Rate ), dated 13.10.2017 by adding entry 23A to the notification No. 09/2017-Inegrated Tax (rate ) dated 28.06.2017– “Services by way of access to a road or bridge on payment of annuity.” If we analyse the this entry we clearly saw that the government has made the law which is something different form the recommendation of the GST council. This may lead to litigation at some future date . Till that time we have to follow the language of the notification which is the law of the date .
This is because the annuity payment is something different from the entry of exemption “ Services by way of access to a road . The annuity is actually deferred payment for the construction of the road.
The availability of Input Tax Credit (ITC):
In the above mentioned discussion we have came to the conclusion that the ownership of the road projects remains with the government and therefore restrictions imposed by the section 17(5) of the CGST Act would not be applicable to the any type of the models as mentioned supra. The concessionaire do not construct the road for itself rather it works for and on behalf of the government and thus can avail the benefit of input tax credit of all goods and services used while carrying out the project against its output GST liability .
Rate of GST :
The tax rate to be applied on such works contract is specified in Notification No. 20/2017- Integrated Tax (Rate) dated 22nd August 2017 wherein “Composite supply of works contracts as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a road, bridge, tunnel, or terminal for road transportation for use by the general public” is taxable at the rate of 12%.
However the projects in which agreement has been entered into the service tax regime with the NHAI the clarification is still needed from the NHAI regarding the payment and reimbursement of GST upon the contractual amount .
Exemptions related to the Road Projects under GST provisions :
The government of India has taken various steps to improve the overall investment in infrastructure projects specifically in road projects and thus to boost the growth of the road infrastructure the some exemptions from the payment of GST has been given by the government . These are explained below :
Exemptions for Toll Charges : The entry no. 23 of Notification No. 12/2017-Central Tax (Rate) states the “Service by way of access to a road or a bridge on payment of toll charges”. Therefore, no GST is payable on payment of toll charges.
Exemption for payment of Annuity : The entry no. 23A of Notification No. 12/2017-Central Tax (Rate), amended by Notification No. 32/2017-Central Tax (Rate) dated 13.10.2017 clearly spelt “Service by way of access to a road or a bridge on payment of annuity” . Therefore, annuity amounts received by the concessionaire from NHAI is exempt.
This article is an endeavor to share some learnings obtained. The views expressed are of the author and are intended solely for informational purpose only. Though due care is taken while preparing the document, possibility of errors cannot be ruled out. Expert guidance, where required and reference to the original act, notification, circular, rules etc is highly recommended.
With the above discussion it is clear that the government has taken various steps to boost the sector but still much have to be done to clear the air and bring more transparency.
(About the author – The author is a member of ICAI and can be reached at Email: [email protected] , Mobile: 09936424523, , Twitter : @CA_NikhilKumar , FB: canikhillko Office: Flat No. 102, First Floor , Vasundhra Complex, Ring Road, Sector-16, Indira Nagar, Lucknow-226016 , U.P., India )