An analysis of the taxability of composite supply of works contract services to Government Entities
In today’s world, the government of the countries are vigorously engaged in discharging its duties of ensuring welfare and development of the state as well the economy. In order to successfully achieve that, the central government, state governments, local authorities and instrumentalities of the state procures a plethora of goods and services from various industries across the country. The government undertakes such activities to ensure overall growth and development as well as ancillary benefits attached to it viz generation of employment, improvement in standard of living and so forth.
In order to, therefore, incentivize the supply of goods and services to the government various form of exemptions and concessions are granted to the concerned suppliers. In this article, we would be discussing about one such concession granted under Sl. No. 3(vi)(a) of Notification No. 11/2017-Central Tax (Rate) dated 28th June 2017 in light of the recent Rajasthan Advance Ruling in In Re: M/S ARG Electricals Pvt Ltd [2020 (38) G.S.T.L. 209 (A.A.R. – GST – Raj.)].
To better understand the issue at hand, it is necessary to review the above ruling for M/s ARG Electricals Pvt Ltd. In the captioned case, the Applicant wanted a ruling determining tax liability in relation to two work orders received from Ajmer Vidyut Vitran Nigam Limited (hereinafter called as ‘AVVNL’), a company incorporated by the Rajasthan government, through the tender process. The work order was granted for Supply, Erection, testing and commissioning of material/equipment for provision of Rural Electricity Infrastructure for Household electrification in selected blocks under Rajiv Gandhi Grameen Vidhyutikaran Yojana scheme on turnkey basis.
At the outset, the Rajasthan Advance Ruling Authority observed that the two work orders are very intricately linked to each other and without performing the one, the other part cannot be performed. First order is for the supply of materials that is supply of goods in which material required to develop infrastructure of electricity is created. Whereas, the second element is design, construction of the said infrastructure. The Authority further held that the work clearly falls under the category of works contract on the ground that the orders are in relation to the completion, erection, installation and commissioning of an immovable property as all projects are turnkey projects and the property in goods cannot be removed without dismantling the same.
Once the position was settled that the present activity is in the nature of works contract, the Authority referred to Notification No. 11/2017-Central Tax (Rate) dated 28th June 2017 to determine the applicable rate of tax. In this regard, it was the contention of the Applicant that they are eligible to concessional rate of tax under Sl. No. 3(vi)(a) to the Notification (Supra), t
The Authority concluded that even though the Applicant is fulfilling most of the conditions provided in the Entry, it does not qualify the condition that the civil structure should be for use other than for commerce, industry, or any other business or profession. In relation to this, the Authority referred to the definition of business under the CGST Act and observed that AVVNL is involved in the supply of goods namely electricity and hence they are involved in the business of supplying goods. They also receive consideration for the supply of electricity. The predominant activity of AVVNL is to supply electricity and work undertaken by the Applicant is to help AVVNL predominantly in this work. Hence, the work undertaken by the applicant in the instant case is an original meant predominantly for use for commerce, industry, or any other business or profession and does not qualify for rate of tax under Sl. No. 3(vi)(a) of the Notification (Supra).
However, it should be noted that if the above interpretation is adopted, the entry would turn otiose. To substantiate the above it is necessary to evaluate the Entry along with the condition prescribed therein. Sub-clause (a) of Entry No. 3(vi) clearly provides that the rate of tax would be applicable only when the civil structure constructed is for use other than for commerce, industry, or any other business or profession. On the contrary, the condition prescribed under the same Entry for government entities provides that the only such services are eligible which have been procured by the entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local authority.
In the present case, AVVNL was established by the government to engage in the business of distribution and supply of electricity and in pursuance thereof they floated the tender wherein the Applicant was granted the work orders. It is therefore given that the construction that is undertaken would be for furtherance of the business of the government entity. However, the Entry clearly specifies that only such civil structures which are not for use in business would be eligible to concessional rate of tax. The Entry, therefore, itself is in contradiction with the condition prescribed therein and the conflict would render the Entry redundant. It is difficult to envisage a scenario wherein a government entity would undertake construction of immovable properties in relation to activities not in furtherance or in the course of business. Such an eventuality would not have been intended by the legislature as the benefit of the Entry would be restricted to a great extent and therefore, in most cases would not be available to the concerned persons.
To conclude, it can be observed that there is an inherent conflict in Entry 3(vi)(a) and the condition prescribed therein under Notification No. 11/2017-Central Tax (Rate) dated 28th June 2017 and the interpretation adopted by the Advance Ruling Authority, if followed subsequently would render the Entry otiose and redundant, as no entity would be able to claim the rate of tax of 12% on works contract services supplied to Central Government, State Governments, Union territories, local authorities, Governmental Authorities or Government Entities.
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