Dpj Bidar – Chincholi (Annuity) Road Project (P.) Ltd VS Union Of India

The petitioners in both writ petitions are concessionaires appointed by respondent no.7, the Karnataka Road Development Corporation Limited, to undertake the construction of roads. These concessionaires are paid an amount termed as ‘annuity’ by respondent no.7 for their construction and maintenance services over the contract period. In certain contracts, where the construction and maintenance tasks are outsourced to private entities, the consideration is provided through allowing these concessionaires/contractors to collect tolls from vehicles using the roads.

The dispute arose regarding a 100% exemption under the Goods and Services Tax (GST) for the collection of toll charges. This exemption was granted through Notification No.12/2017 dated 28.06.2017 issued by respondent no.1. The toll charges encompassed the entire consideration for construction, operation, and maintenance of the roads. Essentially, these toll charges included the fees for construction as well as the services rendered by the concessionaires/contractors.

Certainly! Here’s a detailed summary based on the provided text:

The petitioners in both writ petitions are concessionaires who have been given the responsibility by Karnataka Road Development Corporation Limited (respondent no.7) to construct roads. In exchange for constructing and maintaining these roads for a specified contract period, the petitioners receive payments known as ‘annuity’ from respondent no.7. In some contracts, where the construction and maintenance are outsourced to private entities, the consideration is paid by allowing the concessionaires/contractors to collect tolls from vehicles using the roads.

An important development is the 100% exemption under the Goods and Services Tax (GST) for the collection of toll charges. This exemption was granted through notification No.12/2017 dated 28.06.2017 by respondent no.1. The toll charges encompassed the entire payment for construction, operation, and maintenance of the roads. Essentially, it covered charges collected for both the construction and the services provided by the concessionaires.

Subsequently, there was a proposal to also exempt the annuity payments, which were being made by highway authorities to concessionaires instead of allowing them to collect toll charges, from GST. The minutes of the 22nd GST Council meeting held on 06.10.2017 discuss this proposal:

The Joint Secretary (TRU-II), CBEC introduced Agenda item 13(iv) regarding the exemption of Annuity given in place of Toll Charges to Developers of Public Infrastructure. It was explained that while toll is a payment made by road users to concessionaires for road usage, annuity is an amount paid by the National Highways Authority of India (NHAI) to concessionaires for road construction, thus ensuring that the concessionaire does not charge toll for road access.

It was clarified that annuity is considered a consideration for the services provided by concessionaires to NHAI. The construction of roads was mentioned to be subject to a tax rate of 12%, resulting in a free flow of input tax credit from the Engineering, Procurement, and Construction (EPC) contractors to the concessionaires and then to NHAI. Consequently, the tax at the rate of 12% on the service of road construction provided by concessionaires to NHAI would be paid.

This summary outlines the arrangement where concessionaires are paid annuity for road construction and maintenance, the exemption of toll charges from GST, and the proposal to exempt annuity payments from GST based on the discussions in the GST Council meeting.

The input tax credit was a significant topic of discussion, particularly in relation to exemptions for annuity payments. During the deliberations, it was suggested that the Council might consider granting exemptions for annuity payments made by NHAI (National Highways Authority of India) or State Highways Construction Authority to concessionaires during road construction projects. One member highlighted that toll payments for access to roads or bridges were already exempt from tax.

The Minister from Haryana proposed expanding this provision to include annuity payments made by State-owned Corporations as well. After a thorough discussion, the Council decided to treat annuity payments on par with toll payments, thus deciding to exempt from tax the service provided for access to a road or bridge in exchange for annuity payments.

Following this decision, two notifications, specifically notification no.32/2017 and notification no.33/2017, were issued on 13th October 2017. These notifications outlined the exemption for the service by way of access to a road or bridge upon payment of annuity. This move was a significant step in aligning annuity payments with toll payments in terms of tax treatment, providing clarity and consistency in taxation policies regarding road infrastructure services.

The GST Council discussed the issue of tax exemption for annuity payments made by NHAI/State Highways Construction Authority to concessionaires during road construction. It was noted that toll payments for road access were already exempt from tax. The Minister from Haryana suggested extending this exemption to annuity payments made by State-owned Corporations as well. Following discussions, the Council decided to treat annuity payments similarly to tolls and exempt them from tax for services related to access to roads or bridges.

Subsequently, two notifications (No. 32/2017 and No. 33/2017) were issued on October 13, 2017, which included the exemption for services providing access to roads or bridges on payment of annuity. This meant that the annuity payments made by highway authorities to concessionaires, such as the petitioners in the case, were exempt from GST for both construction and maintenance of roads.

However, there was later a query from certain government authorities seeking clarification on whether the entire annuity amount paid to concessionaires was entirely exempt from GST. This led to the 43rd GST Council meeting on May 28, 2021, where this matter was addressed. The Council’s minutes from this meeting would provide further clarification on the scope of the exemption for annuity payments under GST.

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