GST circular clarifies road construction services taxable despite annuity payments under entry 23A exemption

The Telangana HC dismissed a writ petition challenging a show cause notice demanding GST on annuity payments for road construction services. The petitioner contested the constitutional validity of Circular No.150/6/2021 GST, claiming it contravened existing exemption notifications. The HC held that the circular properly clarified that while services for providing access to roads/bridges are exempt under entry 23A (whether paid as tolls or annuities), construction services remain taxable even when paid through annuities. The court found no contradiction between GST Council recommendations and relevant notifications, ruling that interference at the show cause notice stage was unwarranted without specific jurisdictional errors being demonstrated.

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Issues Involved:

1. Legality of the Show Cause Notice demanding GST on annuity payments.
2. Validity of Circular No.150/6/2021 GST in relation to GST exemptions.
3. Jurisdiction and appropriateness of challenging a show cause notice via writ petition.

Issue-wise Detailed Analysis:

1. Legality of the Show Cause Notice:

The petitioner challenged the Show Cause Notice No.5/2023-24 dated 28.04.2023, which demanded GST on annuity payments received for the period September 2017 to September 2022. The petitioner argued that the annuity payments were exempt from GST under Sl. No.23A of Notification No. 12/2017-CT(Rate) dated 28.06.2017, as amended by subsequent notifications. The petitioner contended that the annuity payments were akin to toll charges, which were exempt from GST, and that the construction and maintenance services were completed before the GST Act, 2017 came into force. The respondent department, however, argued that the services rendered by the petitioner fell under Service Accounting Code (SAC) 9954, which pertains to construction services and is not exempt under the GST notifications. The court found that the determination of whether the services fall under the exempt category requires a fact-finding exercise, which cannot be conducted in a writ petition.

2. Validity of Circular No.150/6/2021 GST:

The petitioner sought to declare Circular No.150/6/2021 GST as ultra vires, arguing that it contradicted the exemption notifications and the 22nd GST Council's recommendations. The circular clarified that GST is not exempt on annuity payments for road construction services, which fall under SAC 9954. The court held that the circular did not contradict the GST Council's resolutions or the notifications, as it merely clarified that the exemption under Entry No.23A applies only to services under SAC 9967 and not to construction services under SAC 9954. The court disagreed with the Karnataka High Court's judgment, which had quashed a similar circular, and upheld the validity of the circular.

3. Jurisdiction and Appropriateness of Challenging a Show Cause Notice:

The court emphasized that ordinarily, a writ petition should not be entertained against a show cause notice, as it does not constitute an adverse order affecting rights unless it is issued without jurisdiction or is otherwise illegal. The court cited several Supreme Court judgments underscoring this principle. The petitioner failed to demonstrate any jurisdictional error or other exceptional circumstances warranting interference at this stage. The court noted that the petitioner could present its claims before the appropriate authority in response to the show cause notice, which might result in the notice being dropped. Consequently, the court dismissed the writ petition, allowing the petitioner to submit an explanation to the respondent authority within four weeks.

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