GST characterization in concessions - Revenue Share vs. Renting of Immovable Property (RCM)

[Abhijeet Mane]

A concession agreement provides that a private operator is granted exclusive rights to develop and operate a hospital on government land. The land is given for long term use under a lease deed, with symbolic nominal rent, and the operator is required to pay a fixed percentage of its gross revenue to the Government as 'concession fee.' The Government also performs certain supervisory and regulatory functions under the PPP structure (clearances, monitoring, compliance oversight, etc.), but all operational risk, cost, manpower and liabilities remain entirely with the private operator, and the agreement expressly states that no partnership or joint venture is created.

The tax authorities have treated this Per year percentage based payment as consideration for renting of immovable property, taxable under GST on reverse charge. The operator's position is that the payment represents revenue sharing under a PPP arrangement, not consideration for a taxable supply, and thus should remain outside GST.

In such PPP concession arrangements, should the revenue linked payment to the Government be characterised as (a) revenue share outside GST, or (b) consideration for leasing/renting of immovable property liable to GST under RCM? What tests or indicators should be applied to determine the correct treatment?

[Sadanand Bulbule]

The primary protection lies in arguing that the Government is not acting as a "Landlord" in a commercial sense, but as a Sovereign State fulfilling its Constitutional obligation under Article 21 (Right to Health).

Principle: Activities performed as a mandatory public duty are not "business" under Section 2(17) of the GST Act. If the activity is not "business," the revenue share cannot be "taxable consideration".

Therefore you develop your defense on such grounds in the larger interest of providing healthcare services which are exempt from GST. Consult experts for effective representation.

This is my personal opinion.

[Ryan Vaz]

The issue turns on whether the revenue-share payment under a PPP concession constitutes “consideration” for renting of immovable property under GST, or a profit-sharing arrangement outside the scope of supply. Key tests to apply:

1. Direct Nexus Test: Rent accrues irrespective of revenue. A variable, revenue-linked payment lacks the direct quid pro quo of rent - it is contingent on business performance, not possession of land.

2. Substance over Form: The dominant character of a PPP concession is the grant of a right to develop/operate a public utility. The operator bears full risk, cost, and liability - inconsistent with a lessor-lessee relationship.

3. Dominant Supply Test (Section 8, CGST Act): The principal supply is the concession/franchise right to operate the hospital, not mere land access. Tax treatment follows the principal supply.

4. Exemption: Examine applicability of Sl. No. 41A, Notification No. 12/2017-CT(Rate) for government services related to public utilities. Assessment: The stronger legal position supports the operator - the revenue share is not consideration for renting of immovable property under RCM. The variable, performance-linked nature of the payment, combined with the operator bearing all operational risk, clearly distinguishes this from a standard lease. That said, given Revenues aggressive stance, the operator should:

(a) obtain a legal opinion or Advance Ruling under Section 97, CGST Act;

(b) document the PPP risk-allocation matrix thoroughly; and

(c) not discharge RCM liability unilaterally, as this may constitute an implicit admission. CBIC clarification on PPP-specific GST treatment remains awaited.

[Shilpi Jain]

Here the terms of the concession agreement would be relevant to conclude.

AI Summary

Consideration for renting of immovable property: revenue linked PPP payments often require nexus and substance tests to determine GST liability. Whether a revenue linked periodic payment by a private operator under a PPP concession is GST taxable as consideration for renting of immovable property depends on its legal character: a variable, performance contingent payment that lacks a direct quid pro quo for land use and where the operator bears all operational risk indicates a concession/franchise principal supply rather than a lease. Key tests are the Direct Nexus Test, Substance over Form, and the Dominant Supply Test; taxpayers should document risk allocation, consider public utility exemptions, seek an Advance Ruling, and avoid unilaterally discharging any reverse charge demand.