GST Payment of Annuity Fees on Roads Construction Still Not Clear

The GST council, in a recent meeting, has put a clarification on the grey area that annuity paid for ‘service provided in the form of access to a road or a bridge shall be exempted from GST.

In India and most of the developing economies across the globe, Road construction projects are operated by the government in partnership with the private sector under the umbrella term Public-Private Partnership (PPP) which can be further categorized into the following three models:

• Build, Operate and Transfer (BOT) Model,
• BOT Annuity Model and
• Hybrid Annuity Model (HAM).

In the case of both the BOT Annuity Model and HAM, the consideration for the execution of the project is accomplished in two parts

1. At the time interval of the construction of roads by way of grants/upfront payments
2. In the form of an annuity that is received on a deferred basis while the operation and maintenance phase is in progress

Despite the several requests and proposals made by the industry, the issue of taxability of annuity that is received for the construction of roads still remains a grey area. Furthering, the differences in the recommendations that are made in the minutes of the 22nd GST council meeting that was held on October 6, 2017, and the notification that was issued in this regard made the issue of ‘taxability of annuity’ a further complex issue. The entire episode is divided into the following stages

• The GST Council in its 22nd forum recommended exemption from the domain of GST the annuity that is received by construction companies for the construction of roads.
• However, by inserting Entry No. 23A to exemption notification, the Central Government had exempted payment of GST on annuity payment for ‘services provided by way of access to a road or a bridge’ Consequently this action provided exemption to services under ‘Heading 9967’ which includes
• Operation services of National Highways, Expressways, State Highways, Roads and Streets, bridges and tunnel operation services and
• No Exemption to annuity payment for construction services that is covered under Heading 9954 as suggested by the GST Council.
• Consequently, there was clearly chaos in the suggestions made by the GST Council GST council is a governing body to regulate and direct each and every step for the implementation of goods and service tax in the nation with decisions over tax rates. Read also about the exemption provided by the Central Government.
• The intention of the law was to exempt from GST annuities received for the construction of roads. Nevertheless, the language of Entry No. 23A of the Notification does not provide evidence to support the said intention resulting in the tax liability on Annuities on the construction of roads.
• However, subsequently, NHAI in its circular clarified that no payment against GST shall be made on annuity payments.
• The construction industry had been taking a position that the annuity payments received on a deferred basis are exempted and GST is not imposable on the same.

Trouble Faced by the Industry

Considering the aforesaid facts and circumstances, especially under the HAM model

• The construction companies received upfront payments which were declared as taxable under GST and
• The annuity payment was exempted as per the discussions in the preceding paragraphs.
• In terms of Section 17 of the CGST Act, Input Tax Credit (ITC) could be availed with respect to only taxable supplies and consequently, ITC pertaining to exempt supplies could not be claimed.
  Furthermore, GST laws also have a provision for the 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.
• The Appellate Advance Ruling Authority (AAAR), Rajasthan in Re: Nagaur Mukundgarh Highways Pvt. Ltd has also ruled that
  the annuity received on the construction of roads is not exempt under GST law. It further passed a ruling that full Input Tax Credit of goods and services obtained cannot be claimed and consequently, the proportionate reversal of Input Tax Credit relating to the annuity is necessary.
• Many of the construction companies have commented that ITC on goods and services received during the construction period should not be reversed as the amount was taxable and annuity payment is received after completion of the construction period. At the same time, the construction industry has been trying to contact the Ministry of Finance, GST Council for resolution of this issue.

Proposal of GST Council’s Meeting

The GST Council in its 43rd meeting Smt @nsitharaman will chair the 43rd GST Council meeting via video conferencing at 11 AM in New Delhi on 28th May 2021. The meeting will be attended by MOS Shri @ianuragthakur besides Finance Ministers of States & UTs. Read also has resolved this issue by clarifying that annuity payments for the construction of roads are taxable. The clarification by GST Council has also cleared the issue with respect to the availability of ITC to the aforesaid companies. So Construction companies would now be eligible to claim ITC of entire goods and services received during the construction period. This will also reduce the accumulation of ITC in the books of accounts of construction companies.

However, no clarification has been provided with respect to the past period