GST on
Construction Activity
Construction Activities can be classified into three categories
–
I)
EPC Model
II)
BOT
III)
HAM Model
Today, we will discuss only HAM Model.
The following points are to be noted for HAM Model –
1)
First Bid won by the parent Company (generally known
as EPC Contractor).
2)
A new SPV (Subsidiary) of EPC contractor to be formed
for the same project. This SPV is solely for that project only.
3)
A concession Agreement is to be made between NHAI (contractee)
& SPV.
4)
EPC agreement is to be mad between EPC Contractor
& SPV.
5)
Construction to be completed by EPC Contractor either alone
or with some sub-contractors.
6)
During the construction Period only 40% Amount will be
released by NHAI & balance amount will be either through private equity or
Bank Financing.
Any amount received during the construction phase is
taxable @18% W.e.f 18-07-2018 earlier it was 12%.
Here, NHAI releases funds in two eras – 1. 40% during
Construction Phase
2. 60%
Post construction in the form of Annuity.
Here
question Arises Whether 60% received Post construction is taxable or not.
Annuity from
the inception of GST wasn’t easy. Hence here we will discuss a recent Case Law
from the Hon’ble High court of Karnataka –
M/S DPJ
Bidar - Chincholi ... vs Union of India on 11 July, 2022.
1. Petitioners in both the writ
petitions are concessionaires who have been entrusted with construction of road
by respondent no.7-Karnataka Road Development Corporation Limited. As a
consideration for construction and maintenance of the roads for the contract
period, the petitioners are paid certain amounts termed as 'annuity' by
respondent no.7. In certain contracts where construction and maintenance of the
roads has been out sourced to private persons consideration is paid by
permitting the concessionaires/contractors to collect tolls from the vehicles
plying on the road.
2. 100% exemption under Goods and
Services Tax (for short 'GST') was granted towards collection of toll charges
by way of notification No.12/2017 dated 28.06.2017 issued by respondent no.1.
The toll charges as already stated above consisted of the entire consideration
towards construction, operation and maintenance of the road. In other words, it
consisted of the charges collected towards construction as well as services
provided by the concessionaires. Subsequently, it was proposed that annuity,
which was being paid by the highway authorities as a consideration to the
concessionaires instead of permitting them to collect toll charges be also
exempted from GST. In this regard, the minutes of 22nd GST Council meeting held
on 06.10.2017 reads as under:
"Agenda item
13(iv): Issue of Annuity being given in Place of Toll Charges to Developers of
Public Infrastructure - exemption thereon
Introducing this Agenda item, the Joint
Secretary (TRU-II), CBEC stated that while toll is a payment made by the users
of road to concessionaires for usage of roads, annuity is an amount paid by the
National Highways Authority of India (NHAI) to concessionaires for construction
of roads in order that the concessionaire did not charge toll for access to a
road or a bridge. In other words, annuity is a consideration for the service
provided by concessionaires to NHAI. He stated that construction of roads was
now subject to tax at the rate of 12% and due to this, there was free flow of
input tax credit from EPC (Engineering, Procurement and Construction)
contractor to the concessionaires and thereafter to NHAI. He stated that as a
result, tax at the rate of 12% leviable on the service of road construction
provided by concessionaire to NHAI would be paid partly from the input tax
credit available with them. He stated that the Council may take a view for
grant of exemption to annuity paid by NHAI/State Highways Construction
Authority to concessionaires during construction of roads. He added that access
to a road or bridge on payment of toll was already exempt from tax. The Hon'ble
Minister from Haryana suggested to also cover under this provision annuity paid
by State-owned Corporations. After discussion, the Council decided to treat
annuity at par with toll and to exempt from tax, service by way of access to a
road or bridge on payment of annuity."
3. In this regard, two notifications
viz., notification no.32/2017 and notification no.33/2017 were issued on
13.10.2017 and the service by way of access to a road or a bridge on payment of
annuity was also exempted. The relevant portions of the notifications read as
under:
"Notification
No.32/2017
(d)
after serial number 23 and the entries relating thereto, the following serial
number and entries shall be inserted namely: -
In this regard, two notifications
viz., notification no.32/2017 and notification no.33/2017 were issued on
13.10.2017 and the service by way of access to a road or a bridge on payment of
annuity was also exempted. The relevant portions of the notifications read as
under:
"Notification
No.32/2017
after
serial number 23 and the entries relating thereto, the following serial number
and entries shall be inserted namely: -
v
Entry
No. 23A
v
Heading 9967
v
Service
by way of access to a road or a bridge on payment of annuity
v
Tax-
NIL
Similar
entry no. 24A exist.
4. Pursuant to the said
notifications, the annuity being paid by the highway authorities to the
concessionaries like the petitioners in the instant case towards construction
as well as maintenance of the road was exempted from GST.
Thereafter,
a clarification was sought from the GST Council by certain government authorities
as to whether the entire annuity paid to the concessionaries was exempt from
GST or not, for which the GST Council in its minutes of the 43rd GST Council
meeting held on 28.05.2021 clarified the same as follows:
"15.33
................................................................................
it was also being clarified that the annuity paid as deferred payment for
construction of roads/highways was not exempted from GST as the tolls or
annuity in lieu of tolls are............................
GST
on annuities paid under the Hybrid Annuity Model Project for construction of
roads: Committee discussed the request of Ministry of Road Transport and
Highways regarding exemption on annuities paid under the Hybrid Annuity Model
Project and has recommended that clarification may be issued that entry 23A of
notification No.12/2017-CT(R) exempts services by way of providing access to
road or bridge on payment of annuity. It does not exempt annuity paid for
construction of roads."
5. Based on the same, a Circular
bearing No.150/06/2021-GST dated 17.06.2021 was issued by respondent no.5
clarifying the same as follows:
"2.1
GST is exempt on service, falling under heading 9967 (service code), by way of
access to a road or a bridge on payment of annuity [entry 23 A of notification
No.12/2017-Central Tax]. Heading 9967 covers "supporting services in
transport" under which code 996742 covers "operation services of
National Highways, State Highways, Expressways, Roads and streets; bridges and
tunnel operation services". Entry 23 of said notification exempts
"service by way of access to a road or a bridge on payment of toll".
Together the entries 23 and 23 A exempt access to road or bridge, whether the
consideration are in the form of toll or annuity [heading 9967].
2.2
Services by way of construction of road fall under heading 9954. This heading
inter alia covers general construction services of highways, streets, roads
railways, airfield runways, bridges and tunnels. Consideration for construction
of road service may be paid partially upfront and partially in deferred annual
payments (and may be called annuities). Said entry 23A does not apply to
services falling under heading 9954 (it specifically covers heading 9967 only).
Therefore, plain reading of entry 23 A makes it clear that it does not cover
construction of road services (falling under heading 9954), even if deferred
payment is made by way of instalments (annuities).
3.
Accordingly, as recommended by the GST Council, it is hereby clarified that
Entry 23A of notification No.12/2017-CT(R) does not exempt GST on the annuity
(deferred payments) paid for construction of roads."
Aggrieved
by the same, the petitioners have preferred the instant writ petitions.
6. The case
of the petitioners is that the annuity (deferred payments) paid for the construction
of roads are exempt from GST as per notification nos.32 and 33/2017 dated
13.10.2017 and the clarification issued by the GST Council in this regard in its meeting held on 28.05.2021 and
the subsequent Circular dated 17.06.2021 issuing clarification regarding the
same is contrary to the exemption notifications and are liable to be set aside.
7. Per contra, the learned counsel
appearing for respondent nos.1 to 5, 8 and 9 submit that the clarification made
by way of a Circular does not contravene the notifications and it only
clarifies what is exempted by virtue of the notifications dated 13.10.2017. It
is specifically contended that what is exempted is only service by way of
access to a road or a bridge on payment of annuity and not annuity (deferred
payments) paid for construction of roads. For the said reasons, they pray for
dismissal of the writ petitions.
8. Admittedly, the toll charges
collected by the concessionaries for construction, maintenance, operation and
providing road access to the vehicle which ply on the road are exempted from
GST by notification no.12/2017 dated 28.06.2017. The said exemption reads as
follows:
Sl.No.
23A
Heading
9967
Description
of Services - Service by way of access to a
road or a bridge on payment of toll charges.
Rate
– NIL
Condition
– NIL
9. Though what is exempted is
mentioned as service by way of access to a road or a bridge on payment of toll
charges, the said toll charges is collected as consideration by the
concessionaires towards construction and maintenance of the road. In short, the
entire consideration for construction and maintenance of the road by
concessionaires which is collected as toll charges is exempt from GST from
01.07.2017 and onwards.
10. Annuity is paid to the concessionaires
in lieu of toll charges. GST Council, in its 22nd meeting held on 06.10.2017
took note of the same and as entire toll charges were being exempted from GST
has decided to recommend exemption of annuity also, which include the
consideration received by concessionaires which is clear from the recordings in
the minute book which is mentioned at paragraph 4 supra. The said recording
makes it clear that it recommended treating annuity on par with the toll
charges.
11. Pursuant to the said meeting, the
notifications no.32/2017 and 33/2017 dated 13.10.2017 have been issued by
respondent no.1 wherein service by way of access to a road or a bridge on
payment of annuity has been exempted from GST and no GST was being collected on
the entire annuity being paid to the concessionaires which included the
consideration towards construction as well as the service that they provide
towards maintenance of the said road. The reading of recommendation of the GST
Council as well as the notifications issued make it clear that respondent no.1
has treated the annuity being paid to the concessionaires on par with toll
charges which the concessionaires are permitted to collect from road users and
both were exempted from GST.
12. Thereafter, for reasons best
known to it, GST Council has clarified that the annuity paid as deferred
payment for construction of roads/highways was not exempted from GST as the
tolls or annuity in lieu of tolls are. Accordingly, the impugned Circular dated
17.06.2021 vide Annexure-N to the petition in W.P.No.22250/2021 and Annexure-S
to the petition in W.P.No.7233/2022 has been issued.
13. It is a settled proposition of
law that a Circular which clarifies the notification cannot have the effect of
overruling the notification. In the instant case, what has to be considered is
whether the impugned Circular is in violation of notification nos.32 and
33/2017 dated 13.10.2017 or clarifies the said notifications.
14. As stated above, the deliberation
of GST Council in its meeting held on 06.10.2017 and the notifications issued pursuant
thereto clearly exempts the entire annuity being paid to the petitioners
towards construction and maintenance of roads. It cannot be construed to have
not exempted the annuity (deferred payments) towards construction of roads. The
impugned circular has the effect of overriding the notifications bearing Nos.32
and 33/2017 dated 13.10.2017 and has to be held as bad in law. Nothing prevents
respondent no.1 from imposing GST on the consideration paid to concessionaires
like the petitioners on the payment received by them by way of annuity but that
has to be done in the manner known to law. In the instant case, respondent no.1
has issued the notifications under Section 11 of the Central Goods and Services
Tax Act, 2017 and Section 6 of the Integrated Goods and Services Tax Act, 2017
exempting the consideration received by concessionaires from highway
authorities as annuity from GST. The clarification issued is contrary to the
said notifications for the reasons recorded above. If respondent no.1 is desirous
of altering the same, it has to issue fresh notifications amending its earlier
notifications.
15. For the aforementioned reasons,
the impugned Circular dated 17.06.2021 vide Annexure-N to the petition in
W.P.No.22250/2021 and Annexure-S to the petition in W.P.No.7233/2022 is hereby
set aside. Consequently, all actions pursuant to the said Circular is hereby
set aside.
16. The writ petitions stand disposed
of accordingly. Pending I.As. stand disposed of.
