MBSIRDA road construction gets 6% GST but utility services face 18% GST rate

AAR Gujarat ruled on classification of composite supply involving design and construction of roads and utility services on EPC basis. The Authority held that construction of roads qualifies as work contract service under Entry 3(iv) of Notification 11/2017, attracting 6% GST (until 17-7-2022, thereafter 18%). However, MBSIRDA was not deemed a local authority under Section 2(69) CGST Act, disqualifying concessional rates for utility services. Construction of other utility services (water supply, sewerage, drainage) constitutes work contract service liable to 18% GST throughout.

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Issues Involved:
1. Whether the supply of design and construction of Roads and Services of TP-1 Area under Cluster-A of MBSIR on EPC Basis can be construed as a Composite Supply of Works Contract under Section 2(119) and Section 2(30) of the CGST Act, 2017.
2. If yes, whether the Principal Supply will be the "Construction of Roads" attracting a rate of 6% [CGST and SGST each] as per Notification No. 11/2017-CT(Rate) dated 28.06.2017 (as amended).

Issue-wise Detailed Analysis:

1. Composite Supply of Works Contract:
The applicant, a consortium formed for the design and construction of roads and services on an EPC basis, received a contract from MBSIRDA. They argued that the scope of work, which includes road network, water supply systems, stormwater systems, sewerage, and other utility services, falls under the definition of a "composite supply" as per Section 2(30) of the CGST Act. The applicant contended that the predominant element of the project is the "Construction of Roads," constituting 53.35% of the total contract price. As per Section 8 of the CGST Act, the tax rate applicable to the principal supply would be applicable to the entire composite supply.

Findings:
The Authority for Advance Ruling (AAR) noted that the design and construction of roads and utility services on an EPC basis involve both goods and services, qualifying as a works contract under Section 2(119) of the CGST Act. However, the AAR found that the construction of roads and other utility services are not naturally bundled and do not constitute a composite supply. Each service is independent and involves components of goods and services, thus falling under the category of works contract services.

2. Principal Supply and Applicable Tax Rate:
The applicant argued that the construction of roads should be considered the principal supply, attracting a concessional tax rate of 6% [CGST and SGST each] under Entry 3(iv) of Notification No. 11/2017-CT (Rate). They also claimed that MBSIRDA is a local authority, which would make the entire contract eligible for a 6% tax rate under Entry 3(iii) of the same notification.

Findings:
The AAR examined the contract and found that it includes various independent services, such as potable water supply, recycled water supply, stormwater systems, and sewerage systems. These services are not naturally bundled with the construction of roads and do not qualify as a composite supply. Consequently, the AAR ruled that the construction of roads alone falls under Entry 3(iv) and attracts a 6% tax rate from 1-7-2017 to 17-7-2022. However, from 18-7-2022 onwards, the tax rate for road construction under the present contract is 18% {9% CGST + 9% SGST} due to the omission of Entry 3(iv) by Notification No. 3/2022-CT (Rate).

Regarding the claim that MBSIRDA is a local authority, the AAR found insufficient evidence to support this. MBSIRDA is constituted under the Gujarat Special Investment Region Act, 2009, and is a body corporate, not a local authority as defined under Section 2(69) of the CGST Act. Therefore, the applicant's supply of works contract services does not qualify for the concessional tax rate under Entry 3(iii).

Ruling:
1. The supply of design and construction of Roads and utility Services of TP-1 Area does not constitute a composite supply.
2. GST rate on the supply of construction of Road Service:
- From 1-7-2017 to 17-7-2022: 12% {CGST 6% + SGST 6%}
- From 18-7-2022 onwards: 18% {CGST 9% + SGST 9%}
3. GST Rate on the supply of construction of all utility services as per the Service Order attracts GST @18% {CGST 9% + SGST 9%}.

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