Road construction projects are developed by the government in partnership with private sector projects (PPP) under different models: construction, operation and transfer (BOT) model, BOT annuity model and annuity model hybrid (HAM).

In the BOT and HAM annuity model, the consideration is received in two parts: at the time of road construction as a grant / upfront payment and as an annuity, which is received on a deferred basis during the construction phase. operation and maintenance.

The taxability of rents received for road construction remains a gray area because very little clarity has been provided on this aspect despite the outcry from the industry. In addition, the discrepancy between the recommendations made in the minutes of the 22nd GST Council meeting on October 6, 2017 and the notification issued in this regard complicated the whole issue regarding the taxation of the annuity.

The GST Council, at its 22nd meeting, recommended exemption from GST on annuities received by construction companies for road construction. However, the central government granted an exemption on the payment of GST on the payment of an annuity for “services provided by means of access to a road or a bridge” by inserting entry No. 23A in the exemption notification. This provided for an exemption for services falling under heading 9967, which includes services for operating national highways, national highways, highways, roads and streets, operating services for bridges and tunnels, and not operating services. Payment of an annuity for construction services is covered by Item 9954, as recommended by the GST Council.

Thus, there was clearly an inconsistency in the recommendation of the GST board with the exemption provided by the central government. The intention of the law was to grant an exemption from the GST on annuities received for road construction but, surprisingly, the wording of entry 23A of the notification does not justify the said intention resulting in tax liability. the annuity tax on road construction. Subsequently, NHAI in its circular clarified that no payment against GST should be made on annuity payments.

The construction industry was of the view that annuity payments received on a deferred basis are exempt and that GST is not payable on the same.

Problems encountered by the industry

In the above scenario, especially under the HAM model, construction companies received upfront payments that were declared taxable under GST and annuities that were exempt as discussed in the previous paragraphs.

Under section 17 of the CGST Act, the ITC can only be used for taxable supplies and, therefore, the ITC for exempt supplies cannot be claimed. In addition, GST laws also provide for the cancellation of ITCs for goods or services, or both used in part to make taxable supplies, including zero-rated supplies and in part to make exempt supplies, and the cancellation of these.

Many construction companies have been questioned by GST officials about the effectiveness of the ITC and have raised objections on the grounds that part of the services provided by them when the annuity payment received is exempt and ordering to these construction companies to cancel the ITC used.

Additionally, the Rajasthan Advance Ruling Authority in Re: Nagaur Mukundgarh Highways Pvt. Ltd has also ruled that the annuity received for road construction is not exempt under the GST law. He further concluded that the entire ITC of the goods and services purchased cannot be claimed and that a pro rata cancellation of the ITC relating to the annuity must be made.

Many construction companies have stated that ITC on goods and services received during the construction period should not be waived because the amount was taxable and the annuity payment is received after the construction period is completed. Simultaneously, the construction industry contacted the Ministry of Finance and the GST Council to resolve this issue.

Recommendations of the GST Council

The GST Council, at its 43rd meeting held on May 28, 2021, clarified that GST is payable on annuity payments received as deferred payment for road construction. He further clarified that annuity paid for “service by access to a road or bridge” is exempt from GST.

Thus, the GST Council solved this problem by clarifying that annuity payments for road construction are taxable. The clarification provided by the GST Council also simplified the issue of the availability of ITC for said companies. Construction companies would now be eligible to claim ITCs on all goods and services received during the construction period. It will also reduce the accumulation of ITCs in the books of construction companies.

However, no specific clarity was provided regarding the past period when the position was unclear under the GST law and whether authorities can impose a tax on annuity payments deemed exempt until. ‘to date due to ambiguity.

Conclusion

Even though the GST Council’s clarification removed the ambiguity, it can also open a Pandora’s box of litigation with respect to transactions for which the exemption was claimed by companies prior to the clarification. So, in order to avoid unnecessary harassment of construction companies, the government needs to tackle the issues and bring a much needed sigh of relief to construction companies who do not want to be embroiled in unnecessary disputes.

(The author is Partner – Indirect Tax, Customs & Trade Group, Singh & Associates)

(The one-stop destination for MSMEs, ET RISE provides news, perspectives, and analysis on GST, exports, finance, politics, and small business management.)

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