Dredging services to State Government qualify as composite supply with earth work exceeding 75% under Notification 39/2017

The AAR, West Bengal ruled that dredging services provided to the Government of Andhra Pradesh Water Resources Department constitutes a composite supply of works contract predominantly involving earth work exceeding 75% of contract value. The Authority determined that supply to a State Government department qualifies as supply to State Government, making it eligible for benefits under Notification No. 39/2017 dated 13-10-2017 Integrated Tax (Rate) Serial No. 3(vii). The dredging work at Prakasam Barrage foreshore was classified as earth work-intensive composite supply to State Government.

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Issues Involved:
1. Whether the Water Resources Department, Government of Andhra Pradesh comes under the purview of the State Government.
2. Applicability of Notification No. 39/2017 dated 13-10-2017 Integrated Tax (Rate) for the item (vii) in this case.

Issue-wise
Detailed Analysis:

Issue 1: Whether the Water Resources Department, Government of Andhra Pradesh comes under the purview of the State Government.
The applicant contends that the Water Resources Department, Government of Andhra Pradesh, qualifies as a State Government entity. The definition of "Government" under clause (53) of section 2 of the CGST Act includes both Central and State Governments. The executive powers of the State are vested in the Governor, exercised through subordinate officers as per Articles 154 and 166 of the Constitution. The Water Resources Department's functions, such as drought proofing, water security, and interlinking rivers, further substantiate its status as a State Government entity. The ruling confirms that the Water Resources Department qualifies as a State Government entity, making the supply to it considered as supply to the State Government.

Issue 2: Applicability of Notification No. 39/2017 dated 13-10-2017 Integrated Tax (Rate) for the item (vii) in this case.
The applicant argues that the work involves predominantly earthwork, constituting more than 75% of the contract value, thus qualifying for a 5% GST rate under Notification No. 39/2017. The contract includes dredging, mobilization, demobilization, and other related activities, predominantly involving earthwork. The applicant provided a certificate from the Executive Engineer, Krishna Central Division, confirming that the cost of material transferred and consumed is less than 25% of the total agreement value. The ruling agrees that the contract qualifies as a composite supply of works contract involving predominantly earthwork, thus attracting a 5% GST rate up to 17th July 2022, and 12% thereafter as per Notification No. 03/2022 Integrated Tax (Rate) dated 13th July 2022.

Observations & Findings:
1. Composite Supply of Works Contract: The contract involves dredging and related activities, qualifying as a composite supply of works contract as per clause (119) of section 2 of the GST Act.
2. Predominantly Earthwork: The work predominantly involves earthwork, constituting more than 75% of the contract value, as confirmed by the Executive Engineer's certificate.
3. Supply to State Government: The supply to the Water Resources Department qualifies as a supply to the State Government, as per the FAQ on Government Services issued by the Central Board of Indirect Taxes & Customs.

Ruling:
The supply undertaken by the applicant to the Water Resource Department, Government of Andhra Pradesh, for desilting the foreshore of Prakasam Barrage is a composite supply of works contract involving predominantly earthwork and is taxable under entry No. 3 (vii) of Notification No. 39/2017- Integrated Tax (Rate) dated 13.10.2017, as amended.

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