Contractor denied GST exemption for sewer works to local authority under Notification 13/2017-CT Rate entry 3B

The AAR, Rajasthan ruled that a contractor providing sewer system works including laying, jointing, testing and commissioning services to Bikaner Nagar Nigam was not entitled to GST exemption under entry 3B of Notification 13/2017-CT (Rate). The Authority held that Bikaner Nagar Nigam qualified as a local authority and the applicant was providing works contract services involving supply of goods and services for immovable property. Since the services were provided to a local authority, the case fell under entries 3 and 3A rather than 3B of the notification, requiring 18% GST payment as previously discharged by the applicant.

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Issues Involved:
1. Applicability of GST exemption under entry 3B of Notification No. 13/2023-CT (Rate) for services related to sewer system installation and commissioning.
2. Classification of the services provided as works contract and its implications on tax liability.
3. Interpretation of the term "Governmental Authority" and its relevance to the exemption claim.

Issue-wise Detailed Analysis:

1. Applicability of GST Exemption under Entry 3B:
The applicant, engaged in providing services related to the installation and commissioning of a sewer system, sought clarity on the applicability of GST exemption under entry 3B of Notification No. 13/2023-CT (Rate). The notification exempts services provided to a Governmental Authority in areas such as water supply, public health, sanitation conservancy, solid waste management, and slum improvement. The applicant argued that their services fall under sanitation conservancy and hence should be exempt. However, the ruling concluded that the exemption under entry 3B is not applicable to the applicant's services because the services are provided to a local authority (Nagar Nigam Bikaner), which does not qualify under the definition of a Governmental Authority for the purposes of this exemption.

2. Classification as Works Contract:
The services provided by the applicant were classified as a works contract, which involves a composite supply of goods and services related to immovable property. According to Section 2(119) of the CGST Act, a works contract is defined as a contract for various activities such as building, construction, and installation, where the transfer of property in goods is involved. The ruling emphasized that the applicant's services constitute a works contract since they involve the supply of goods along with services for an immovable property. Consequently, the services are not eligible for exemption under entry 3B, which primarily pertains to pure services or composite supplies with a goods component not exceeding 25%.

3. Interpretation of "Governmental Authority":
The applicant's claim for exemption hinged on the interpretation of "Governmental Authority." The ruling clarified that a Governmental Authority, as defined in the notification, refers to an entity set up by an Act of Parliament or a State Legislature with significant government participation to perform functions entrusted to a Municipality under Article 243W of the Constitution. The ruling noted that the services provided to Nagar Nigam Bikaner, a local authority established under the Rajasthan Municipalities Act, do not fall under the scope of services provided to a Governmental Authority as intended by the exemption.

Conclusion:
The ruling concluded that the services provided by the applicant do not qualify for the GST exemption under entry 3B of Notification No. 13/2023-CT (Rate), as they are classified as works contract services provided to a local authority, not a Governmental Authority. Therefore, the applicant is liable to pay GST on the services rendered.

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