GST on annuity received on Construction of Roads

There are many issues under GST which are left unanswered by the Government. One of such issues is taxability of annuity received by the concessionaries from the Government/NHAI (National Highways Authority of India) in execution of road projects

Hence, it is important to understand where the problem persists.

The execution of road projects for NHAI typically could be undertaken by contractors under following 3 models:

• Engineering Procurement & Commissioning (EPC)/ Build and transfer model;
• Build, operate & Transfer (BOT)- Toll Revenue/Annuity Model;
• Hybrid Annuity Model- which is a combination of EPC & Annuity Model.

In the first model, consideration is given in a lumpsum amount. Under the later two models, the consideration is usually being paid in two parts:

1. Payment in construction phase either on lumpsum basis or on milestone basis; and
2. Annuity payment while the operation and maintenance phase are under progress.

The annuity payments are different from the toll payments.

Toll is a payment made by users of road to concessionaires for the usage of roads, whereas annuity is an amount paid by NHAI to concessionaires for the construction of roads. Generally, annuity payments are made by NHAI where the right to collect toll charges has not been granted to the concessionaire.

As per Notification No 11/2017- Central Tax (Rate) dated 28.06.2017, works contract services by way of construction of roads [SAC-9954] for road transportation for use of general public attracts GST at the concessional rate of 12%. However, the said services were exempted from the levy of service tax under the pre-GST regime in terms of Notification No. 25/2012 dated 20.06.2012.

As per Notification No. 12/2017 Central Tax (Rate) dated 28.06.2017 services by way of access to a road or a bridge on payment of toll charges are exempted. However, no exemption has been granted in respect of annuity payments received by concessionaire from NHAI towards construction. In the 22^nd GST Council meeting held on 06.10.2017, recommendations with respect to taxability of annuity has been considered. In this regard, SI. No. 23A has been inserted by Notification No. 32/ 2017- CTR dated 13.10.2017 in Notification No. 12/ 2017-CTR to exempt service by way of access to a road or a bridge on payment of annuity'

Since, the exemption that has been granted is with respect to services covered under SAC 9967 viz., Supporting services in transport and not in respect of construction services classifiable under SAC 9954, for which consideration received is by way of annuity. Thus, the contentious issue of GST on annuity was not addressed by the Government.

As the matter of annuity was still not resolved, again representations have been put up by industries upon which Government clarified that exemption in SI No. 23A is applicable only in respect of services covered under 9967 and not under SAC 9954 by way of Circular No. 150/ 06/2021-GST dated 17.06.2021 in its 43rd GST Council Meeting held on 28-05-2021

Due to this contrariety tax treatment and continuing stance of the Government, it appears that the annuity received by concessionaries from Government towards construction of roads under Models II & III is made leviable to GST and the exemption under SI. No. 23A does not apply.

In, Nagaur Mukundgarh Highways Pvt. Ltd., Udaipur [NMHPL] vs. Hon'ble Rajasthan Appellate Authority for Advance Ruling ('AAAR'), the AAAR has considered the applicability of SI. No. 23A with respect to annuity payments received by applicant from NHAI. To understand the scope of said entry, the AAAR has discussed the background under service tax regime, and also agenda and minutes of the 22nd GST Council Meeting. Following are the key points from ruling supra.

As per t he minutes of 22nd GST Council Meeting, Agenda was discussed regarding issue ofexempt ion to Annuity which is being paid to the Concessionaires by NHAI in place of Toll Charges to Developers of Public Infrastructure. It was opined that Council may take a view for grant of exemption to annuity paid by NHAI to concessionaires during construction of roads since the toll charges were exempted from Service tax & GST and the annuity here is paid in place of toll charges.

Alt er discussion, the Council decided to treat annuity at par with toll charges and to exempt from tax, service by way of access to a road or bridge on payment of annuity. And there-after, SI. No. 23A has been introduced in the exemption notification.

Considering the above, SI. No. 23A squarely covers annuity paid to Concessionaire.

The whole project can be divided into two parts, one is construction phase and second is Operation and maintenance phase. If the activity of concessionaire is connected with annuity, then it is classifiable under SAC 9967 and if activity is having nexus with construct ion payments during construction phase is works Contract which is taxable at 12% under SAC 9954.

Thus, there is no hitch in providing the benefit of SI. No. 23A to the annuity payments i.e. road construction payments received alter construction (i.e., during O&M phase).

Thus, from the minutes of 22nd GST Council Meeting it is clear that the intention behind introduction of SI. No. 23A is to consider exempt ion towards annuity paid by NHAI to concessionaire in place of toll charges. However, language of SI. No. 23A does not substantiate said intent resulting in tax liability on annuities received by concessionaire.

By way of the said ruling, a ray of hope is given for the concessionaires as regards applicability of exemption to annuity payments. In light of these developments, the following issues have remained unanswered:

1. Since the concessionaire is responsible for O&M of road in both cases viz., annuity payments by NHAI or collection of toll charges, whether annuity payments can be equated to toll charges?
2. Whether annuity payments by NHAI to concessionaire during O&M phase of road projects can be treated as consideration for services classifiable under SAC 9967?
3. If SI. No. 23A does not cover annuity payments what situations and payments are covered under Sr. No. 23A?

Conclusion:

In view of the questions which remained unanswered, the industry may represent again before the Government to provide exemption for annuities received towards construction services in the lights of minutes of 22^nd GST Council Meeting as well as under Section-11(2) of the CGST Act, 2017, which empowers the Government to grant exemption at least  for the past period under special circumstances  on the ground that the industry is all along of the view that annuity is exempt from GST; and  also as it  will be big boost towards building the nation.