The annuity payments are different from toll payments.
By Satya Sai and Satish Gandla
Dan Brown said “When a question has no correct answer, there is only one honest response. The grey area between yes and no. Silence”.
This indeed is the stance of the Government in resolving various grey issues left unanswered under GST. One such issue is taxability of annuity received by the concessionaires from Government/NHAI in execution of road projects.
Before the deep dive, it is pertinent to understand where the problem persists. The execution of road projects for NHAI typically could be undertaken by contractors under following models:
- Engineering Procurement & Commissioning (EPC) /Build and Transfer Model
- Build, Operate & Transfer (BOT) – Toll Revenue/Annuity Model
- Hybrid Annuity Model – which is a combination of EPC + Annuity Model
Under the first model, consideration agreed is a lump sum amount. Under the latter two models, the consideration is usually being paid in two parts:
- Payments in construction phase either on lumpsum basis or on mile stone basis; and
- Annuity payment while the operation and maintenance phase are under progress.
The annuity payments are different from toll payments. While toll is a payment made by users of road to concessionaires for usage of roads, annuity is an amount paid by NHAI to concessionaires for construction of roads. Generally, annuity payments are made by NHAI where the right to collect toll charges has not been granted to the concessionaire.
As per Sl. No.3(iv) of the Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017, the works contract services by way of construction of roads [Service Accounting Code (SAC) 9954] for road transportation for use by general public are leviable to GST at the concessional rate of 12%. However, the said services were exempt from levy of service tax under the pre-GST regime in terms of Notification No. 25/2012-Service Tax dated 20.06.2012.
Sl. No. 23 of Notification No. 12/2017-CTR dated 28.06.2017 exempts service by way of access to a road or a bridge on payment of toll charges. No exemption has been granted in respect of annuity payments received by concessionaire from NHAI towards construction.
After representations made by the construction industry, 22nd GST Council Meeting held on 06.10.2017 has considered and made recommendations with respect to taxability of annuity. In this regard, Sl. No. 23A has been inserted by Notification No. 32/2017- CTR dated 13.10.2017 in Notification No. 12/2017-CTR to exempt “service by way of access to a road or a bridge on payment of annuity”.
The exemption that has been granted is with respect to services covered under SAC 9967 viz., Supporting services in transport and not in respect of construction services classifiable under SAC 9954, for which consideration received is by way of annuity. Thus, the contentious issue of GST on annuity was not addressed by the Government.
Again, upon receipt of representations from the industry, the Government has considered the issue in the recent 43rd GST Council Meeting held on 28.05.2021 and has issued a Circular No.150/06/2021-GST dated 17.06.2021 wherein it was clarified that exemption under Sl. No. 23A is applicable only in respect of services covered under 9967 and not under SAC 9954.
Due to this contrariety tax treatment and continuing stance of the Government, it appears that the annuity received by concessionaries from Government towards construction of roads under Models II & III is made leviable to GST and the exemption under Sl. No. 23A does not apply.
Here, the Authors seek the readers attention to the advance ruling pronounced by the Hon’ble Rajasthan Appellate Authority for Advance Ruling (‘AAAR’) in the case of Nagaur Mukundgarh Highways Pvt. Ltd., Udaipur (NMHPL) reported at 2019 (3) TMI 1076. In this, the AAAR has considered the applicability of Sl. No. 23A with respect to annuity payments received by applicant from NHAI. To understand the scope of said entry, the AAAR has discussed the background under service tax regime, and also agenda and minutes of the 22nd GST Council Meeting.
Following are the key take-aways from ruling supra:
- As per the minutes of 22nd GST Council Meeting, Agenda item 13(iv) was discussed regarding issue of exemption to Annuity which is being paid by NHAI to the Concessionaires in place of Toll Charges to Developers of Public Infrastructure. It was opined that Council may take a view for grant of exemption to annuity paid by NHAI to concessionaires during construction of roads since the toll charges were exempted from Service tax & GST and the annuity here is paid in place of toll charges.
- After discussion, the Council decided to treat annuity at par with toll charges and to exempt from tax, service by way of access to a road or bridge on payment of annuity. And thereafter, Sl. No. 23A has been introduced in the exemption notification.
- Considering the above, Sl. No. 23A squarely covers annuity paid to Concessionaire.
- Whole project can be divided into two parts – one is construction phase and second is O&M phase. The activity of concessionaire having nexus with annuity is classifiable under SAC 9967 and activity having nexus with construction payments during construction phase is works Contract which is taxable at 12% under SAC 9954.
- Thus, there is no hitch in providing the benefit of Sl. No. 23A to the annuity payments i.e. road construction payments received after construction (i.e., during O&M phase).
It is apparent from the minutes of 22nd GST Council Meeting that the intention behind introduction of Sl. No. 23A is to consider exemption towards annuity paid by NHAI to concessionaire in place of toll charges. However, language of Sl. No. 23A does not substantiate said intent resulting in tax liability on annuities received by concessionaire.
However, the aforesaid ruling has given a ray of hope for the concessionaires as regards applicability of exemption to annuity payments. However, this area has again been painted in grey by clarification given in circular supra.
In light of these developments, the following issues have remained answered:
- Since the concessionaire is responsible for O&M of road in both cases viz., annuity payments by NHAI or collection of toll charges, whether annuity payments can be equated to toll charges?
- Whether annuity payments by NHAI to concessionaire during O&M phase of road projects can be treated as consideration for services classifiable under SAC 9967?
- If Sl. No. 23A does not cover annuity payments, what situations and payments are covered under Sl. No. 23A?
In light of minutes of 22nd GST Council Meeting and based on observations made in the ruling supra, is it possible to argue that the annuities paid by NHAI to Concessionaire are covered by exemption under Sl. No. 23A? In view of the recent circular, the answer appears to be negative. In such a case, industry may represent again before the Government to provide exemption for annuities received towards construction services in light of minutes of 22nd GST Council Meeting as well under Section 11(2) of the CGST Act, 2017, which empowers the Government to grant exemption at least for the past period under special circumstances on the ground that industry is all along of the view that annuity is exempt from GST; and also, as it will be a big boost towards building the Nation. It will put the issue at rest by requiring the Government to paint the grey area with black & white i.e., giving much needed clarity and clear the chaos!
(The authors are Joint Partner and Senior Associate, respectively in GST Practice, Lakshmikumaran & Sridharan, Hyderabad. The views expressed in this Article are strictly personal.)