Government Works Contract Time of Supply

[Dora Babu]

We have a client engaged in doing Government works contracts which is continuous supply of service and Invoice as per section 31(5) applicable and RA bills are raised for each stage of completion.

As per the work order agreement between Government and client, Government shall pay the RA Bill amount within 28 days of Executive engineer approval but the amount was received after 2 years of EE approval which we observe in common in Government contracts.

The client pays the output GST at the time of receipt of payment. Now, post GST Audit, Central GST department issued notice demanding interest on delayed payment of GST output. They mentioned as per the RA Bill work completion date is 2 years before payment receipt and invoice need to be issued as per 31(5)(c). As client haven't issued invoice, as per section 13, date of invoice will be the date of supply of service and GST Department is demanding Interest amount of 40lakhs for the 2 years period.

How can we pay GST Output when the receipt of payment from the government department is uncertain? How to defend my client position?

Need guidance!

[YAGAY and SUN]

The Department's demand is founded on the premise that, under Section 31(5)(c) of the CGST Act, the taxpayer was required to issue a tax invoice upon certification/completion of the milestone reflected in the RA Bill. Consequently, by virtue of Section 13(2), GST became payable on the date the invoice ought to have been issued, and interest under Section 50 is sought for the intervening period.

However, the key issue is whether EE certification itself resulted in an unconditional and enforceable right to receive payment. If the contract envisages further approvals, verification, deductions, fund allocation, or other conditions precedent, it may be argued that consideration had not crystallized upon EE certification alone.

For invoking Section 31(5)(c), the Department must establish not only completion of the milestone but also that the amount became contractually due and payable on such date. In Government contracts, RA Bills are often subject to administrative scrutiny and release of funds, which may support the contention that payment remained contingent.

Accordingly, the validity of the demand would depend upon the specific payment clauses, RA Bill mechanism, certification process, and documentary evidence demonstrating that payment was not unconditionally due upon EE approval. If such contingency can be established, the demand for interest may be contested.

However, if the contract clearly provides that payment becomes due upon EE certification, the Department's position would be comparatively stronger.

[Sadanand Bulbule]

In terms of Section 2(33) of the CGST Act, mere raising of RA Bills does not make a service a continuous supply: the contract must contemplate continuous/recurrent supply over a period with identifiable milestones or periodic payment obligations.

[Shilpi Jain]

See if there were any deductions or changes to the figures post the Engineer certification to show that such certification does not mean payment approval.

Secondly the contract clauses would be of utmost importance here to again relook coverage under the above referred provision. Whether this payment within the referred time is directory and not mandatory then can we defend? All these aspects need to be checked

[Amit Agrawal]

If your client is okay with prologned dispute / litigation as well as potential risk of 10% penalty (calculated w.r.t. principal tax liability), following grounds (among many other grounds, dependeing upon various facts & circumstances) may be taken:

Relevant portion of Section 50 reads as follows:

50. (1) Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made thereunder, but fails to pay the tax or any part thereof to the Government within the period prescribed, shall for the period for which the tax or any part thereof remains unpaid, pay, on his own, interest at such rate, not exceeding eighteen per cent., as may be notified by the Government on the recommendations of the Council.

Provided that ................

(2) The interest under sub-section (1) shall be calculated, in such manner as may be prescribed, from the day succeeding the day on which such tax was due to be paid.”

Now, the most relevant question, to my mind, is what is the “period / due day prescribed” for payment of 'subject tax-dues'?

Section 37(7) throws some light of above question, which reads as under:

“Every registered person who is required to furnish a return under sub-section (1), other than the person referred to in the proviso thereto, or sub-section (3) or sub-section (5), shall pay to the Government the tax due as per such return not later than the last date on which he is required to furnish such return:

................”

However, above-said Section 37(7) prescribes due-date of payment of taxes ONLY for “tax dues” disclosed / declared as per return.

And, your client has paid taxes (after alledged delay of 2 years) by disclosing such liability in the return (after alleged delay of 2 years).

So, there is no delay in payment of taxes and there is no liability to pay interest u/s Section 50(1) read with Section 37(7).

These are ex facie views of mine and the same should not be construed as professional advice / suggestion or recommendation.

[Amit Agrawal]

Please read last para as follows:

So, there is no delay in payment of taxes from point of view ofSection 50(1) & 50(2) read with Section 37(7) and hence, there is no interest liability u/s 50.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion or recommendation.

AI Summary

GST time of supply in government works contracts depends on RA bill certification, contract terms, and contingent payment conditions. Government works contracts raising RA bills may create a dispute on the time of supply of GST and interest where payment is received long after Engineer approval. One view is that if tax is disclosed and paid through the return, no interest arises under section 50 read with the return-filing provisions. Another view focuses on section 31(5)(c) and section 13, and whether the amount became contractually due on certification. The contract terms, payment clauses, certification process, and any contingencies or post-certification deductions are crucial.