Sub-sub-contractor providing irrigation services liable for 18% GST, not concessional 12% rate under Notification 11/2017-CT(R)

The AAR Gujarat ruled that a sub-sub-contractor providing irrigation construction and maintenance services to a sub-contractor is liable to pay 18% GST, not the concessional 12% rate. The authority held that only main contractors supplying services directly to government and their immediate sub-contractors qualify for the reduced GST rate under Notification 11/2017-CT(R). Since the applicant was a sub-sub-contractor supplying services to a sub-contractor rather than directly to the main contractor, they did not meet the notification's conditions for the concessional rate.

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Issues Involved:
1. Determination of the applicable GST rate for services provided by sub-sub-contractors to sub-contractors.
2. Classification of services provided by sub-sub-contractors to the irrigation department, State of Gujarat.
3. Whether the GST rate should be 12% or 18%.

Detailed Analysis:

1. Determination of the Applicable GST Rate for Services Provided by Sub-Sub-Contractors to Sub-Contractors:
The applicant, a sub-sub-contractor, sought clarification on the GST rate applicable to their services provided to a sub-contractor for original contract work with the irrigation department, State of Gujarat. The applicant argued that they should be subject to a 12% GST rate as per Notification No. 20/2017-Central Tax (Rate) dated 22-8-2017, which specifies a 12% GST rate for composite supply of works contract supplied by way of construction, erection, commissioning, or installation of original works pertaining to irrigation and construction works supplied to the government.

However, the authority observed that the applicant, being a sub-sub-contractor, does not satisfy the conditions outlined in the notification. Specifically, the notification requires that the composite supply of works contract must be provided by the main contractor to the government or by a sub-contractor to the main contractor providing services to the government. Since the applicant is neither the main contractor nor a direct sub-contractor to the main contractor, they do not qualify for the 12% GST rate under this notification.

2. Classification of Services Provided by Sub-Sub-Contractors to the Irrigation Department, State of Gujarat:
The applicant classified their services under the SAC code for composite supply of works contract as defined in clause (119) of Section 2 of the CGST Act, 2017. They argued that their services should be classified under the same head as the main contractor and sub-contractor, which pertains to irrigation and construction work supplied to the irrigation department.

The authority, however, clarified that the classification under the relevant SAC code and the corresponding GST rate is contingent upon the relationship between the service provider and the recipient. Since the applicant is a sub-sub-contractor, their services do not directly fall under the specified entries for main contractors or sub-contractors providing services to the government.

3. Whether the GST Rate Should Be 12% or 18%:
The applicant contended that the GST rate applicable to their services should be 12%, similar to the rate applicable to the main contractor and sub-contractor. They cited various judgments to support their claim, arguing that the intent of the government was to harmonize the GST rates for main contractors and sub-contractors providing services to government entities.

The authority, however, emphasized the need for strict interpretation of the notification's wording. The notification clearly specifies that the concessional 12% GST rate applies only to main contractors providing services to the government and sub-contractors providing services to the main contractor for government projects. Since the applicant is a sub-sub-contractor providing services to a sub-contractor, they do not meet the conditions for the 12% GST rate.

Conclusion:
The authority ruled that the GST rate on the subject supply is 18% for services supplied by the sub-sub-contractor to the sub-contractor. The supply merits entry at Heading 9954, Entry No. 3(ii) of Notification No. 11/2017-CT(R) dated 28-6-17. The applicant's services do not qualify for the 12% GST rate applicable to main contractors and sub-contractors providing services to the government.

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