State Government sand extraction contract deemed service supply attracting 18% GST on reverse charge basis

The AAR Kerala ruled that a contract between the State Government and a business entity for extracting sand and mud from a dam reservoir constitutes a service supply from the government to the applicant. The service falls under SAC 997337 (licensing services for mineral rights) and attracts 18% GST. The applicant, as the recipient of service from the State Government, is liable to pay GST on reverse charge basis under Notification No. 13/2017 on the Rs. 15 crores consideration. The exemption claim under Entry No. 3 of Notification No. 12/2017 was rejected as the applicant was receiving services from, not providing services to, the government.

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Issues Involved:

1. Eligibility for exemption under Entry No. 3 of Notification No. 12/2017 Central Tax (Rate) dated 28.06.2017.
2. Liability to pay GST under reverse charge mechanism as per Notification No. 13/2017 Central Tax (Rate) dated 28.06.2017.

Detailed Analysis:

Issue 1: Eligibility for Exemption under Entry No. 3 of Notification No. 12/2017 Central Tax (Rate) dated 28.06.2017

The applicant, a private limited company, was awarded a tender for desilting the Mangalam Reservoir by the Irrigation Department, Government of Kerala. The applicant sought to determine whether their services qualify for exemption under Entry No. 3 of Notification No. 12/2017 Central Tax (Rate), which exempts "Pure Services (excluding work contract services or other composite supplies involving supply of any goods) provided to the Central Government, State Government or Union territory or local authority or a governmental authority by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution."

The applicant contended that the desilting service is a pure service without any material element and should be exempt as it is provided to a State Government department. However, upon detailed examination, it was found that the transaction involves two supplies: a service (desilting) and goods (residues such as clay, soil, and sand). The service provided by the applicant is classified under SAC 997337, which pertains to licensing services for the right to use minerals, including exploration and evaluation. This classification attracts GST at the rate of 18% [CGST - 9% + SGST - 9%] as per entry at SI. No. 17 (viii) of Notification No. 11/2017 Central Tax (Rate) dated 28.06.2017.

The ruling concluded that the applicant is not eligible for the exemption under Entry No. 3 of Notification No. 12/2017 Central Tax (Rate) as the service provided does not qualify as a pure service exempted under the said notification.

Issue 2: Liability to Pay GST under Reverse Charge Mechanism

Given that the service in question is taxable, the applicant sought clarification on whether they can pay GST under the reverse charge mechanism as per SI. No. 5 of Notification No. 13/2017 Central Tax (Rate) dated 28.06.2017, which states that the tax on services supplied by the Central Government, State Government, Union territory, or local authority to a business entity shall be paid by the recipient on a reverse charge basis.

The ruling affirmed that the applicant, as the recipient of the service supplied by the Irrigation Department of the Government of Kerala, is liable to pay GST on a reverse charge basis. This is consistent with the provisions of Notification No. 13/2017 Central Tax (Rate).

Rulings:

1. Exemption Eligibility: The applicant cannot avail the benefit of exemption under Entry No. 3 of Notification No. 12/2017 Central Tax (Rate) as the service provided is taxable under SAC 997337, attracting GST at the rate of 18%.

2. Reverse Charge Mechanism: The applicant is liable to pay GST on a reverse charge basis as per entry at SI. No. 5 of Notification No. 13/2017 Central Tax (Rate).

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