In re Shenwa Infrastructure Private Limited (GST AAR Maharashtra)
In a ruling that provides critical clarity for infrastructure companies, the Maharashtra Authority for Advance Ruling (AAR) has held that the interest component received on deferred payments under the Hybrid Annuity Model (HAM) is liable for Goods and Services Tax (GST). The authority concluded that such interest is part of the total consideration for the construction services provided and must be taxed at the same rate as the principal supply.
The decision, in the case of In re Shenwa Infrastructure Private Limited, aligns with a recent clarification from the Central Board of Indirect Taxes and Customs (CBIC) and sets a clear precedent for contractors undertaking large-scale infrastructure projects financed through the increasingly popular HAM framework.
Background of the Application
Shenwa Infrastructure Private Limited, a company executing a concession agreement with the Public Works Department (PWD) of the Government of Maharashtra, approached the AAR for a ruling. The agreement involves the construction, improvement, and widening of major district roads in the Thane district on a Design, Build, Operate, and Transfer (DBOT) basis under the Hybrid Annuity Model.
The central question revolved around the payment structure stipulated in the contract. Under the HAM agreement, a portion of the Bid Project Cost (BPC) is paid by the authority (PWD) during the construction phase, linked to the achievement of specific physical progress milestones. The balance of the project cost is deferred and paid to the concessionaire (Shenwa Infrastructure) in bi-annual installments over a period of 10 years after the Commercial Operation Date (COD) of the project.
Crucially, these deferred bi-annual payments, referred to as “Annuity Payments,” include an interest component. As per the contract, interest is payable on the reducing balance of the outstanding project cost at a rate equivalent to the applicable Bank Rate plus three percent. Shenwa Infrastructure sought clarity on whether this interest component was subject to GST and, if so, what the applicable classification and tax rate would be.
The Hybrid Annuity Model (HAM) Payment Structure
To understand the core of the issue, it is essential to examine the HAM payment mechanism outlined in the concession agreement. The contract stipulated:
