GST Clarity On Road Annuity Payments May Brew Fresh Problems

Highway contractors need to be mindful of the tax implication on annuity payments.

<div class="paragraphs"><p>Image source: storyset on Freepik</p></div>
Image source: storyset on Freepik

A recent GST notification released at the end of last week has cleared ambiguities regarding the levy of GST on annuities received by highway contractors as deferred payment for construction services. However, lawyers argue, that may brew fresh complications and possibly further tax cascading.

Following recommendations of the GST council, on Friday the Central Board of Indirect Taxes, issued amendments to its previous notification dated June 28, 2017, to omit the provisions under 23A of the document, with effect from Jan. 1.

Provision 23A allowed for GST exemption on services rendered by way of 'access to a road or a bridge' irrespective of whether the payment made to the contractor was through toll, or by way of an annuity paid to the contractor in lieu of the toll.

Therefore now, road contractors who receive annuities in place of toll from the public from National Highway Authority of India will be subjected to GST on the annuity payment.

Highway contractors usually receive payments for road construction services through a right to collect toll charges from passengers which goes towards construction and maintenance or through deferred payment from the government in installments called 'annuities' after the completion of a project.

The matter was the subject of previous litigation earlier in July when the Karnataka High court upheld that annuity payment awarded by highway authorities to concessionaires is exempt from goods and services tax.

The Karnataka High Court, whose previous judgement was in favour of contractors, had noted in their judgment that the government can issue fresh notifications amending its earlier notifications in order to send the desired message.

This makes the the recent notification nothing more than a legal enactment of the suggestions from the previous judgement which was expected according to Ritesh Kanodia, partner at Economic Laws Practice.

He told BQ Prime, “The deletion of entry 23A was expected considering the decision of the Karnataka High Court upholding the exemption of GST on annuity payments. Interestingly this was not discussed in the GST council meeting and has come as a surprise amendment.''

This opens the implications to various interpretations. According to Abhishek A Rastogi, author and founder of Rastogi Chambers, this could also mean a cascading of taxes for the contractor as the final price for the highway that is toll is GST free.

"As a corollary (of the recent notification), depending on the contractual terms, the total cost for recipient may increase in certain cases. As toll to final consumers is exempt, there will be tax cascading in most of the cases,” Rastogi told BQ Prime.

This single line in the notification also does not offers any resolution to the dilemma on GST applicability for the past period, says Kanodia. He hopes the government could consider offering a specific relief for the interim period thereby putting an end to this litigation.

All that's clear is what this means for the highway contractors now- they need to be mindful of the tax implication on annuity payments.

Kanodia also added that they (contractors) will need to invoke the change in law clause for recovering GST and start taking offset for GST, including for capital goods and inputs lying in stock.