Municipal corporation operation and maintenance contracts are taxable composite supplies under GST, not pure services

AAR Maharashtra ruled that operation and maintenance contracts with municipal corporations are taxable composite supplies under GST, not pure services. The contractor must pay CGST and SGST at 9% each from July 2017, reduced to 6% each from August 2017. From January 2018, exemption applies only if goods value doesn't exceed 25% of total supply value. The applicant is entitled to ITC on purchases subject to statutory conditions. GST liability rests with the supplier, and municipal authorities' refusal to pay GST doesn't affect the contractor's tax obligation.

---

---

Issues Involved:
1. Determination of GST leviable on operation and maintenance work order given by municipal corporations.
2. Admissibility of ITC (Input Credit Tax) of purchases against such work order.
3. Determination of responsibility of municipal authority of discharging such GST liability payable to the contractor.
4. Applicability of GST on Service Contract where labor job contributes 95% to 98% of contract value and 2-3% as oil and lubricant and pertains to consumable purchase to operate the existing plant.

Detailed Analysis:

Issue 1: Determination of GST Leviable on Operation and Maintenance Work Order Given by Municipal Corporations

The applicant, a registered civil contractor, sought clarity on the applicability of GST on operation and maintenance (O&M) contracts awarded by various municipal corporations. The contracts primarily involved labor (95%) and consumables (5%). Initially, under the old indirect tax regime, these services were exempt from service tax. However, under the GST regime, the services were taxed as per Notification No. 11/2017 dated 28.06.2017 and Notification No. 20/2017 dated 22.08.2017, which levied CGST and SGST at 9% each from 01.07.2017 and reduced to 6% each from 22.08.2017. The municipal corporations argued that these services were exempt under Article 243W of the Constitution, which was found incorrect. The ruling clarified that the services involved supply of goods and services, making them composite supplies subject to GST. Post 25.01.2018, the services would be exempt only if the value of goods does not exceed 25% of the composite supply value.

Issue 2: Admissibility of ITC (Input Credit Tax) of Purchases Against Such Work Order

The applicant is eligible for availing ITC under the CGST Act, 2017, provided the conditions in Sections 16 to 22 of the CGST Act and Rules 36 to 45 of the CGST Rules, 2017, are met. The ruling emphasized that the applicant must possess a tax invoice, have received the goods or services, and the tax must be paid to the government for claiming ITC. Additionally, the applicant must furnish the return under Section 39 and ensure that the goods are received in full if delivered in lots or installments.

Issue 3: Determination of Responsibility of Municipal Authority of Discharging Such GST Liability Payable to the Contractor

The ruling stated that the liability to pay GST is on the supplier, which is the applicant in this case. The ruling did not offer comments on the recovery of GST from the recipient, i.e., the municipal authority. The applicant must ensure compliance with GST provisions irrespective of the municipal authority’s stance on GST applicability.

Issue 4: Applicability of GST on Service Contract Where Labor Job Contributes 95% to 98% of Contract Value and 2-3% as Oil and Lubricant and Pertains to Consumable Purchase to Operate the Existing Plant

The ruling reiterated that under the GST Act, 2017, the services attracted CGST and SGST at 9% each from 01.07.2017 and 6% each from 22.08.2017. Post 25.01.2018, the services would be exempt only if the value of goods does not exceed 25% of the composite supply value. The ruling emphasized that the services provided by the applicant are not pure services due to the inclusion of supply of materials and consumables, making them composite supplies subject to GST.

Conclusion:

The ruling clarified that the operation and maintenance contracts involving both labor and consumables are subject to GST, with specific tax rates applicable before and after 25.01.2018. The applicant is eligible for ITC subject to compliance with GST provisions. The responsibility to pay GST lies with the supplier, and the services would be exempt post 25.01.2018 only if the value of goods does not exceed 25% of the composite supply value.

Order:

1. GST Leviable: Services attracted CGST & SGST @ 9% each from 01.07.2017 and @ 6% each from 22.08.2017. Post 25.01.2018, services are exempt only if the value of goods does not exceed 25% of the composite supply value.
2. Admissibility of ITC: Eligible for ITC under GST Act/Rules subject to conditions in Sections 16 to 22 of the GST Act and Rules 36 to 45 of the GST Rules, 2017.
3. Responsibility of Municipal Authority: Liability to pay GST is on the supplier; no comments on recovery from the recipient.
4. Applicability of GST on Service Contract: Services attracted CGST & SGST @ 9% each from 01.07.2017 and @ 6% each from 22.08.2017. Post 25.01.2018, services are exempt only if the value of goods does not exceed 25% of the composite supply value.

---