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WORK CONTRACTS AND IMPLICATIONS FOR ROADS OR

HIGHWAYS.

November 7, 2021 By FCS Deepak Pratap Singh

Dear Friends,

You are aware that India is a big country on the basis of area and transportation
infrastructure is essential for development of country. The transport through roads  is the
major source of transportation in India, 70% of freight  and 85% of passengers are travelling
in India through roads. We have 6.22 ( as on 31/03/2020) millions K.M., road network and
second largest in the world. It will also be noted that till 31/03/2020 on 2% (1,38,551 KMs)of
total roads in India consist of National Highways and contributing more than 40% of
transport through these roads. The development of highways or expressways are the most
important to develop Indian as a world business hub. The transport system whether for
goods or passengers are the most important now days. The Central Government has taken
various steps to increase connectivity and development of highways /national highways.

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The National Highway  Authority of India ( NHAI) is the authority set up by the government to
look after development of various National Highways Development Projects (NHDP). These
projects generally developed in collaboration of private parties as Public Private
Partnership(PPP) basis through Built Operate and Transfer(BOT)-Annuity, BOT-Toll Model
and BOT-Hybrid Annuity Model. 

LET’S CONSIDER SOME KEY WORDS;

BOT-Toll (PPP): The BOT stands for the Build Operate and Transfer. In this type of the model
a concession agreement is entered into between the NHAI and Private developer/ operator (
concessionaire) in which the concessionaire is responsible for the designing , building,
financing , operating and transferring the project at the end of the concession period. In this
types of the model the government generally made the provision of VGF (Viability Gap
Funding)  to make the venture economically viable for the concessionaire . The concessionaire
receives the commercial returns in the nature of toll revenue at the government regulated
rates. Also the commercial risk pertains to the concessionaire .

BOT- Annuity (PPP) :  The concessionaire is responsible for the designing , building, financing
, operating and transferring the project at the end of the concession period. The financial
returns to the concessionaire through predetermined semi annual annuity payments made by
then government . In this model the government is responsible for collecting toll revenue and
the commercial risk is not transferrable to the concessionaire .

 OPERATE, MAINTAIN AND TRANSFER (OMT) CONCESSION : NHAI has recently taken up
award of select highway projects to private sector players under an OMT Concession. Till
recently, the tasks of toll collection and highway maintenance were entrusted with tolling
agents/ operators and subcontractors, respectively. These tasks have been integrated under
the OMT concession. Under the concession private operators would be eligible to collect tolls
on these stretches for maintaining highways and providing essential  services (such as
emergency/ safety services).

HYBRID ANNUITY MODEL :  Concessionaire responsible for Designing, Building, Financing

(60% of the Project Cost),Operating and Transferring the project at end of concession period.
Recovery of 60% of Project Cost through bi-annual annuity payments and separate market
linked interest payment on reducing balance method . In addition, provisions for separate
O&M payments . The payments are inflation indexed.
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Concessionaire receives Construction Support of 40% of  Project Cost in five equal

investments. Toll collection to be the responsibility of the Authority

TAXABILITY OF ANNUITY PAYMENTS UNDER GST:

The term “ Works Contract” is defined under Section 2(119) of CGST Act, 2017 as follows;

“ a contract for-building ,construction, fabrication, completion, erection , installation, fitting,

improvement ,modifications, repair, maintenance, renovations , alteration or commissioning
of any immovable property wherein transfer of property in goods(whether as goods or in
some other form) is involved in the execution of such contracts.”

Concession agreements are of two types;

1. Construction or Renovations of Highways;

2. Operation and Maintenance of Highways.

In bother cases , the. Scope of work include a transfer of. Property in goods along with the
services of construction o renovation or repair and maintenance as provided under above
definition. Thus above transaction comes under definition of “Supply” under provisions of
Section 6 of the CGST Act,2017 and liable to tax underCGST Act,2017.

FOR MORE CLARIFICATION LET’S CONSIDER A DECIDED CASE;

Ashoka Infrastructures Vs. State of Maharashtra (2014-VIL-12-MSTT) – the key aspects of

case were;   Question involved – whether the contract taken up by the appellant could be
said to be worked contract and whether he could be said to be dealer as envisaged under
Maharashtra Sales Tax on Transfer of Property in goods involved in the execution of Work
Contract MD liable to pay tax on turnover of sales in respect of the goods used at the time
of the road construction?   BRIEF FACTS; BOT Project agreement was entered on
28.08.1997-agreement was for period of 8 years and 9 months.Appellant was given right
of collection of toll, expenditure incurred by them was to be recovered by way of toll during
the concession period and upon completion of the lease was to hand-over the property
back to the Government free of cost.   JUDGEMENTS; Section 2(d) for the Act -essential

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ingredients;He has to be a person;Whether they work for valuable consideration,

commission ,remuneration or otherwise;The person transferred property in goods involved
in the execution of works contract.   Handing. Over the project free of cost is after the
concession period is over , as it as deemed that entire cost of project ,inclusive of interest
and expenses and profits have been realised. In this case the contention of the appellant
that he is not earning any profit cannot be accepted..   Appellant is a legal person. There is
valuable consideration involved and which has been recovered during concession period.
There is involvement of transfer of property in goods and hence he will be considered as a
“Dealer” under the said Act.   Hence BOT Project involved both goods and services and
therefore, it is a works contract. Once it is well cleared that the appellant is a dealer under
the Act and he is involved in a works contract , then he is liable under the Act to pay tax on
sales turnover.  

CONTRACT FOR OPERATION AND MAINTENANCE OF HIGHWAYS;

 Such types of the contract is generally awarded by the NHAI in the nature of composite
supply of service.  In such type of contracts the principal supply  would depend upon
 contract to contract basis . If the principal supply is the operation of the highway then it will
be termed as the same and will not be in the nature of the work contract.

The supplies of services of operation and maintenance are generally naturally bundled in the
ordinary course of business, the same would qualify as a composite supply. In order to
determine taxability of the composite supply it is relevant to determine the supply which
qualifies as a “ Principal Supply”.

“ if a Principal Supply is “Operation” of the Highways( as determined from the contract) the
contract would not qualify as a “ Works Contract” since. Operations of an immovable
property s not specifically covered under the ambit of the Works Contract” under GST.”

If the Principal Supply is the maintenance and repair services of highways ,the same would
qualify as “ Works Contract”.

MODE OF PAYMENT

EXEMPTIONS RELATED TO THE ROAD PROJECTS UNDER GST PROVISIONS :

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The government of India has taken various steps to improve the overall investment in
infrastructure projects specifically in road projects and thus to boost the growth of the road
infrastructure the some exemptions from the payment of GST has been given by the
government .

These are explained below :

EXEMPTIONS FOR TOLL CHARGES : 

The entry no. 23 of Notification No. 12/2017-Central Tax (Rate) states the  “Service by way of
access to a road or a bridge on payment of toll charges”. Therefore, no GST is payable on
payment of toll charges.

EXEMPTION FOR PAYMENT OF ANNUITY : 

The entry no. 23A of  Notification No. 12/2017-Central Tax (Rate) , amended by Notification
No. 32/2017-Central Tax (Rate) dated 13.10.2017 clearly spelt “Service by way of access to
a road or a bridge on payment of annuity” . Therefore, annuity amounts received by the
 concessionaire from NHAI is exempt.

INPUT TAX CREDIT RESTRICTIONS;  

In the above mentioned discussion we have came to the conclusion that the ownership of the
road projects remains with the government and therefore restrictions imposed by the section
17(5) of the  CGST Act would not be applicable to the any type of the models as mentioned
supra. The concessionaire do not construct the road for itself rather it works for  and on
behalf of the government and thus can avail the benefit of input tax credit of all goods and
services used while carrying out the project against its output GST liability .

PLEASE NOTE THAT:  the land or land appurtenant there to on which theses highways are
developed belong to NHAI and not the private operator. It can be said that the models be it
DBFOT-TOLL or ANNUITY Based( or hybrid annuity model), the concessionaire cannot be
said to be procuring goods and services on its own account ( there is no self service) for

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construction of immovable property and thus , can avail ITC on all goods and services used
while carrying out the project against output GST, if any.

CONCLUSION: from above  it is cleared that the GST on payment made through toll charges
or annuity payment by NHAI to the concessioner are exempt from GST and the Input Tax
Paid by the the private operators i.e. the concessionaires will be available to them as Input
Tax Credit.

DISCLAIMER:  the above article is only for information and knowledge of readers. It is
advisable to go through relevant act. And notifications for more clarity and do consult with
your tax consultant before taking any action on any part of article.  

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Kanoon for All is the platform to understand the law in a very simple and authentic language. We
strive our best to bring the law in your own manner so that the same could be easily enjoyed by you
by understanding the facilities (i.e. fundamental rights and Personal Liberty) given by “The
Constitution of India”.

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