In its recent meeting the Council had clarified that annuity paid for ‘service by way of access to a road or a bridge’ is exempt from GST.
Road construction projects are developed by the government in partnership with Private Sector projects (PPP) under various models: Build, Operate and Transfer (BOT) Model, BOT Annuity Model and Hybrid Annuity Model (HAM).
In both BOT Annuity Model and HAM, the consideration is received in two parts: at the time of construction of roads in forms of grants/upfront payments and in form of annuity, which is received on deferred basis during the operation and maintenance phase.
The taxability of annuity received for construction of roads remains a grey area as very less clarity has been provided on this aspect despite the hue and cry made by the industry. Further, discrepancy in the recommendations made in the minutes of 22nd GST Council meeting on October 6, 2017 and the notification issued in this regard complicated the entire issue concerning taxability of annuity.
The GST Council in its 22nd meeting recommended exemption from GST on annuity received by construction companies for construction of roads. However, the Central Government provided exemption on payment of GST on annuity payment for ‘services provided by way of access to a road or a bridge’ by inserting Entry No. 23A to exemption notification. This provided exemption to services under Heading 9967 which includes operation services of National Highways, State Highways, Expressways, Roads and Streets, bridges and tunnel operation services and not to annuity payment for construction services is covered under Heading 9954 as recommended by the GST Council.
Thus, there was clearly an inconsistency in the recommendation by GST council with the exemption provided by the Central Government. The intention of law was to provide exemption from GST on annuities received for construction of roads but surprisingly, language of Entry No. 23A of the Notification does not substantiate the said intent resulting in tax liability on Annuities on construction of roads. Subsequently, NHAI in its circular clarified that no payment against GST shall be made on annuity Payments.
The construction industry was taking a position that the annuity payments received on deferred basis are exempt and GST is not leviable on the same.
Issues faced by the industry
In the above scenario, especially under HAM model, the construction companies were in receipt of upfront payments which was declared as taxable under GST and annuity payment which was exempt as per discussions in foregoing paragraphs.
In terms of Section 17 of the CGST Act, ITC can be availed with respect to only taxable supplies and therefore, ITC pertaining to exempt supplies cannot be claimed. Further, GST laws also provide for reversal of ITC of goods or services, or both partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies, and reversal thereof.
Many construction companies have been questioned by the GST officials regarding the efficacy of ITC and raising objections on the ground that part of services provided by them where annuity payment received is exempt and directing such construction companies to reverse ITC availed.
Moreover the Appellate Advance Ruling Authority, Rajasthan in Re: Nagaur Mukundgarh Highways Pvt. Ltd has also ruled the annuity received on construction of roads is not exempt under GST law. It further held that full ITC of goods and services procured cannot be claimed and proportionate reversal of ITC pertaining to annuity is required to be made.
Many of the construction companies have said that ITC on goods and services received during construction period is not to be reversed as the amount was taxable and annuity payment is received after completion of construction period. Simultaneously construction industry has been approaching the Ministry of Finance, GST Council for resolution of this issue.
Recommendations of GST Council
The GST Council in its 43rd meeting held on May 28, 2021 has clarified that GST is payable on annuity payments received as deferred payment for construction of roads. It further clarified that annuity paid for ‘service by way of access to a road or a bridge’ is exempt from GST.
Thus, the GST Council has resolved this issue by clarifying annuity payments for construction of roads is taxable. The clarification by GST Council has also simplified the issue with respect to availability of ITC to said companies. Construction companies would now be eligible to claim ITC of entire goods and services received during construction period. This will also reduce the accumulation of ITC in books of accounts of construction companies.
However, no specific clarity has been provided with respect to past period where the position was not clear under GST law and whether the authorities can demand tax on the annuity payments treated as exempt till date on account of ambiguity.
Even though the clarification by the GST Council removed the ambiguity, it may also open a Pandora’s Box of litigation with respect to the transactions where the exemption has been claimed by companies before the clarification. Thus, in order to avoid unnecessary harassment to construction companies, the government must address the issues and bring a much needed sigh of relief to construction companies who do not want to be entangled in pointless disputes.
(The writer is Partner – Indirect Tax, Customs & Trade Group, Singh & Associates)