Around the year 2016, with increasing involvement of private partnership in public infrastructure projects, Hybrid Annuity Model (HAM) began taking its roots in the Indian economy, arising out of a need to have a better financial mechanism for road development. Existing models such as Build Operate Transfer (BOT) required the private developers to take huge financial risk which required heavy investments. Hence, HAM was approved for Public Private Partnership (PPP) projects to accelerate construction of roads in the country by reviewing benefit of private partners in highway projects.

However, despite considerable positive impacts of this model, GST applicability under this model remains a grey area as little clarity is provided by the authorities which is proving to be a nagging point. While the work undertaken by the concessionaire under HAM is similar to that undertaken under the conventional BOT model, in the new model, payments are made both during and after the construction phase as upfront payment and as annuity respectively.

TREATMENT OF AMOUNTS RECEIVED DURING CONSTRUCTION PERIOD

Although such amounts are in the nature of grants/ subsidy provided by the government, the same are treated as construction-linked and taxable under GST in the absence of any specific exemption. The point of difference here to be noted is that the underlying nature of these payments is similar to grants received under the conventional BOT model which is not taxable under GST. Accordingly, treating them as taxable is not in line with government's intention in relation to PPP Projects.

TREATMENT OF ANNUITIES

The Central Government on recommendation of the 22nd GST Council exempted ‘services by way of access to roads on payment of annuity' under Heading 9967, from payment of GST. It may be noted that these payments are in lieu of construction services provided by the concessionaire. However, the exemption notification provides for exemption on annuities paid in lieu of provision of access to roads and not for construction of roads. Further, the Explanatory Notes to the Scheme of Classification of Services - Heading 9967 inter-alia covers ‘operation services of highways, roads, streets etc.' but does not cover construction.

Therefore, there appears a contradiction between the language and the intention of law. Relying on the intention of law, NHAI vide a circular dated March 03, 2017, and October 23, 2017, clarified that annuity payments are exempt from GST. This view has also been affirmed by the Appellate Advance Ruling Authority, Rajasthan in Re: Nagaur Mukundgarh Highways Pvt. Ltd. 2019 (23) G.S.T.L. 214 (App. A.A.R.- GST).

INPUT TAX CREDIT (ITC) AND REVERSALS

We all know ITC forms the essence of GST ensuring that tax is levied only on the value additions made by the supplier of goods and services. ITC on goods and services in relation to construction services has been disallowed as per Section 17(5)(c) & (d) of CGST Act, 2017. However, this restriction is in respect of construction and not for works contract service. Accordingly, ITC of GST paid on input and input services utilized by the concessionaire is available since the work involved under HAM qualifies as works contract services.

However, GST department lately has been raising the issue that as per Section 17(2) of the CGST Act, 2017, the concessionaire should reverse the ITC attributable to payment of annuity which is an exempt supply. In this regard going by plain interpretation of Rule 42 of the CGST Rules, 2017, ITC attributable to commonly used inputs and input services is required to be reversed basis the ratio of exempted and taxable supplies in a financial year. Further, it is pertinent to note that the said input services/ goods have been procured by the concessionaire during the construction period and exemption from GST has been granted only for the annuity paid after the construction phase.

Reversal under Rule 42 of the CGST Rules prescribes for final calculation for the entire financial year, wherein the value of ITC - exempted turnover and total turnover for the said financial year is to be taken. Therefore, the calculations are to be done basis the values for a tax period or financial year and not for multiple financial years. Thus, where the concessionaire has not received annuity payment during construction period, the entire turnover is taxable and no ITC reversal is required.

However, in case of Nagaur Mukundgarh Highway (supra), the Appellate Authority of Advance Ruling has held that the applicant is not eligible to claim full ITC of goods and services procured. It shall be required to reverse the proportionate ITC pertaining to annuity payments and ITC can be claimed only with respect to taxable supplies.

Due to the above ruling there is a lot of confusion in the construction industry with respect to the eligibility to avail entire ITC used for construction of roads with respect to HAM projects.

CONCLUSION

Ambiguous provisions in conjunction with contrary rulings passed make the law clearly against government's intention to provide tax benefits to construction industry in PPP projects. If the benefit of ITC is not provided to the construction industry, it will have a negative impact on this industry which is facing challenges in adopting clear cut tax positions on projects undertaken under HAM.

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