Advance Ruling- What should be the rate of GST on works contract for constructing a civil structure for a Govt entity

Fol­low­ing Advance rulling passed by the WEST BENGAL AUTHORITY FOR ADVANCE RULING GOODS AND SERVICE TAX in the case of  ITD Cemen­ta­tion India Ltd  on 08.01.2019

1.The Appli­cant is stat­ed to be sup­ply­ing works con­tract ser­vice. He has entered into an agree­ment with Inland Water­ways Author­i­ty of India (here­inafter the IWAI) for con­struc­tion of a mul­ti-modal IWT ter­mi­nal at Hal­dia on EPC basis.

The Appli­cant seeks a rul­ing on applic­a­bil­i­ty of Noti­fi­ca­tion No. 24/2017-CT (Rate) dat­ed 21/09/2017 and 31/2017 – CT (Rate) dat­ed 13/10/2017. More specif­i­cal­ly, he wants a rul­ing on what should be the rate at which GST should be charged on the works con­tract ser­vice to be sup­plied for con­struc­tion of the above terminal.

The ques­tion is admis­si­ble under sec­tion 97(2)(b) of the CGST / WBGST Act, 2017 (here­inafter col­lec­tive­ly referred to as “the GST Act”).

The con­cerned offi­cer has raised no objec­tion to admis­si­bil­i­ty of the Appli­ca­tion. The Appli­ca­tion is admitted.

2. Noti­fi­ca­tion No. 24/2017 – CT (Rate) dat­ed 21/09/2017 and 31/2017 – CT (Rate) dat­ed 13/10/2017 have amend­ed Noti­fi­ca­tion No. 11/2017 – CT (Rate) dat­ed 28/06/2017 (here­inafter the Rate Noti­fi­ca­tion). As a result, Ser­i­al No. 3(vi) of the Rate Noti­fi­ca­tion, post such amend­ments, stands as below.

Sl No	Heading	Descrip­tion of the service	Rate	Condition
(1)	(2)	(3)	(4)	(5)
3	9954	Com­pos­ite sup­ply of works con­tract as defined in clause (119) of sec­tion 2 of the Cen­tral Goods and Ser­vice Tax Act, 2017, pro­vid­ed to the Cen­tral Gov­ern­ment, State Gov­ern­ment, Union Ter­ri­to­ry, a local author­i­ty, a Gov­ern­men­tal Author­i­ty or a Gov­ern­ment Enti­ty by way of con­struc­tion, erec­tion, com­mis­sion­ing, instal­la­tion, com­ple­tion, fit­ting out, repair, main­te­nance, ren­o­va­tion, or alter­ation of‑a civ­il struc­ture or any oth­er orig­i­nal work meant pre­dom­i­nant­ly for use oth­er than for com­merce, indus­try, or any oth­er busi­ness or profession:a struc­ture meant pre­dom­i­nant­ly for use as (i) an edu­ca­tion­al, (ii) a clin­i­cal, or (iii) an art or cul­tur­al estab­lish­ment: ora res­i­den­tial com­plex pre­dom­i­nant­ly meant for self-use or the use of their employ­ees or oth­er per­sons spec­i­fied in para­graph 3 of the Sched­ule III of the Cen­tral Goods and Ser­vice Tax Act, 2017.	6	Pro­vid­ed            that where the ser­vices are sup­plied to a Gov­ern­ment Enti­ty, they should have been pro­cured by the said enti­ty in rela­tion to a work entrust­ed to it by the                      Cen­tral Gov­ern­ment, State Gov­ern­ment, Union ter­ri­to­ry or local author­i­ty, as the case may be.

Noti­fi­ca­tion No. 17/2018 – CT (Rate) dat­ed 26/07/2018 appends an Expla­na­tion to the above entry. It clar­i­fies that for pur­pos­es of the above entry, the term ‘busi­ness’ shall not include any activ­i­ty or trans­ac­tion under­tak­en by the Cen­tral  Gov­ern­ment, a State Gov­ern­ment or any local author­i­ty in which they are engaged as pub­lic author­i­ties. This Expla­na­tion does not include with­in it ambit a Gov­ern­men­tal Author­i­ty or a Gov­ern­ment Entity.

3. The Appli­cant sub­mits that con­struc­tion of the Mul­ti-modal IWT Ter­mi­nal amounts to com­pos­ite sup­ply of works con­tract ser­vice. The con­tractee is a Gov­ern­ment Enti­ty, being a statu­to­ry body estab­lished under the Inland Water­ways Author­i­ty of India Act, 1985 (here­inafter the IWAI Act, 1985), and func­tions under the admin­is­tra­tive con­trol of the Min­istry of Ship­ping, Gov­ern­ment of India. The sup­ply is, there­fore tax­able @ 12% under the GST Act in terms of Ser­i­al No. 3(vi) of the Rate Noti­fi­ca­tion, as men­tioned above. In sup­port of his argu­ment the Appli­cant refers to let­ter no. 198/Representation/MOF/GST Council/2017/2899 dat­ed 14/03/2018 of the GST Coun­cil to the con­tractee. In the said let­ter  the Coun­cil draws atten­tion to Noti­fi­ca­tion No. 31/2017 – CTR dat­ed 13/10/2017, amend­ing the Rate Noti­fi­ca­tion, and says, “The sta­tus of IWAI vis-à-vis the def­i­n­i­tion of ‘Gov­ern­ment Enti­ty’ as explained at para 4(x) of Noti­fi­ca­tion No. 31/2017 – CTR dat­ed 13/10/2017 may be exam­ined. It is to fur­ther add that con­se­quent upon to this amend­ment, the com­pos­ite sup­ply of works con­tract to Gov­ern­ment Enti­ty by way of con­struc­tion, erec­tion, etc would attract GST @ 12%.”

4. Noti­fi­ca­tion No. 31/2017 – CT (Rate) dat­ed 13/10/2017 defines the terms ‘Gov­ern­men­tal Author­i­ty’ and ‘Gov­ern­ment Enti­ty’ under para 4(ix) and (x) respec­tive­ly. Both refer inter alia to an author­i­ty set up by an Act of Par­lia­ment or a State Leg­is­la­ture with 90% or more par­tic­i­pa­tion by way of equi­ty or con­trol. The Gov­ern­men­tal Author­i­ty, how­ev­er, is estab­lished to car­ry out func­tions entrust­ed to a Munic­i­pal­i­ty or Pan­chay­at under Art 243 W or 243 G of the Con­sti­tu­tion respec­tive­ly: where­as, a Gov­ern­ment Enti­ty is set up to car­ry out any func­tion entrust­ed by the Cen­tral Gov­ern­ment, State Gov­ern­ment, Union Ter­ri­to­ry or local authority.

Accord­ing to the objects and rea­sons of the IWAI Act, 1985, the IWAI is an Author­i­ty set up for “the reg­u­la­tion and devel­op­ment of inland water­ways for the pur­pose of ship­ping and nav­i­ga­tion and for mat­ters con­nect­ed there­with or inci­den­tal there­to.” The Cen­tral Gov­ern­ment appoints and removes mem­bers of the IWAI, pro­vides grants and loans, sanc­tions projects, gives direc­tions, makes rules, and can super­sede the Author­i­ty if required. The IWAI is thus a statu­to­ry author­i­ty under direct con­trol of  the Cen­tral Gov­ern­ment. It is, there­fore, a ‘Gov­ern­ment Enti­ty’ in terms of para 4(x) of Noti­fi­ca­tion No. 31/2017 – CT (Rate) dat­ed 13/10/2017. Let­ter of the GST Coun­cil high­lights this sta­tus of the IWAI.

5. GST is payable @ 12% on sup­ply of works con­tract ser­vice to a Gov­ern­ment Enti­ty, which is point­ed out in the Council’s above-men­tioned let­ter. How­ev­er, it is sub­ject to the terms and con­di­tions of Ser­i­al No. 3 (vi) of the Rate Noti­fi­ca­tion, as described above.

The con­ces­sion under Ser­i­al No. 3 (vi) of the Rate Noti­fi­ca­tion is con­tract spe­cif­ic. The recip­i­ent Gov­ern­ment Enti­ty should pro­cure the works con­tract ser­vice in rela­tion to a work entrust­ed to it by the Cen­tral Gov­ern­ment, State Gov­ern­ment, Union ter­ri­to­ry or local author­i­ty, as the case may be. If it is not cov­ered under Ser­i­al No. 3(vi) (b) or 3(vi) (c ), it should be a civ­il struc­ture or an orig­i­nal work meant pre­dom­i­nant­ly for use oth­er than for com­merce, indus­try, or any oth­er busi­ness or pro­fes­sion [Ser­i­al No. 3(vi)(a)].

6. Sec­tion 14(1)(b) of the IWAI Act, 1985 empow­ers IWAI to set up infra­struc­tur­al facil­i­ties for nation­al water­ways. No such projects, how­ev­er, can be under­tak­en with­out approval from the Cen­tral Gov­ern­ment unless the amount involved is below a thresh­old [2nd pro­vi­so to sec­tion 13 and sec­tion 14(4) of the IWAI Act, 1985]. There­fore, con­struc­tion of mul­ti-modal IWT Ter­mi­nal, involv­ing Rs 517.36 crore, if law­ful­ly con­tract­ed, is a project under­tak­en with­in the func­tion­al author­i­ty entrust­ed to IWAI and with Govt sanc­tion, sat­is­fy­ing the con­di­tion under col­umn (5) of the Ser­i­al No. 3(vi) of the Rate Notification.

7. The scope of the work includes design and con­struc­tion of berths and relat­ed fix­tures, approach tres­tles, con­vey­or tres­tles, ter­mi­nal admin­is­tra­tion build­ing, work­ers’ ameni­ty build­ing, elec­tri­cal sub-sta­tion build­ing, secu­ri­ty office, weigh bridge build­ing, com­pres­sor house, stor­age shed, inter­nal roads and path­ways, water sup­ply works, storm water drainage works, sew­er­age sys­tem, gate house com­plex, emer­gency gates, cul­verts, diver­sion of exist­ing roads, silos, con­vey­or sys­tem, fixed barge load­ers, road weigh bridge, stock­yard devel­op­ment, elec­tri­cal works, com­mu­ni­ca­tion and IT sys­tem etc. It is clear­ly an orig­i­nal work and involves con­struc­tion of civ­il structures.

How­ev­er, it is amply clear from the very nature of the project that it cre­ates infra­struc­ture for com­mer­cial uti­liza­tion of the nation­al water­way. Pre­dom­i­nant use of the infra­struc­ture so cre­at­ed is, there­fore, for facil­i­tat­ing com­merce and busi­ness. IWAI may, as indi­cat­ed in its let­ter to the GST Coun­cil referred to above, levy and col­lect fees and charges from the users of the infra­struc­tur­al facil­i­ties being created.

In its let­ter dat­ed 12/02/2018 to the GST Coun­cil IWAI has made no ref­er­ence to this spe­cif­ic con­tract, but admits to levy­ing a user charge on the com­mer­cial oper­a­tors for nav­i­gat­ing through the water­way using facil­i­ties as being cre­at­ed. All such fees and charges received are, accord­ing to the above-men­tioned let­ter of IWAI, cred­it­ed to the Con­sol­i­dat­ed Fund of India. The Appli­cant argues that the very fact of such cred­it to the Con­sol­i­dat­ed Fund of India clear­ly estab­lish­es that the fees so col­lect­ed are not pro­ceeds from business.

All rev­enues received by the Govt of India, all loans it rais­es by issue of trea­sury bills, or ways and means advances and all mon­eys received by it in repay­ment of that loans form, under Art 266(1) of the Con­sti­tu­tion, the Con­sol­i­dat­ed Fund of India. The Applicant’s argu­ment, there­fore, implies that the user fees col­lect­ed by IWAI are not pro­ceeds from busi­ness but rev­enues col­lect­ed by the Gov­ern­ment of India.

8. Sec­tion 10 of the IWAI Act, 1985 man­dates it  to act  on busi­ness prin­ci­ples while dis­charg­ing its func­tions. Sec­tion 14(1)(k) even allows IWAI to set up joint ven­tures with

equi­ty par­tic­i­pa­tion for the pur­pose of inland ship­ping. There­fore, unless pro­ceeds from such activ­i­ties, includ­ing user fees and charges, are cred­it­ed to the Con­sol­i­dat­ed Fund of India, they must be con­strued as pro­ceeds from com­merce and business.

Sec­tion 17(1) of the IWAI Act, 1985 empow­ers IWAI to col­lect user fees with pre­vi­ous approval of the Cen­tral Gov­ern­ment. All such fees and charges are cred­it­ed to the Inland Water­ways Author­i­ty of India Fund, con­sti­tut­ed under sec­tion 19(1) of the IWAI Act, 1985 and not to the Con­sol­i­dat­ed Fund of India.

The IWAI is clear­ly not the Gov­ern­ment of India, but a Gov­ern­ment Enti­ty hav­ing no sov­er­eign author­i­ty to col­lect  Gov­ern­ment rev­enue. More­over, con­trary to what  the Appli­cant claims, the user fees that IWAI col­lects is not cred­it­ed to the Con­sol­i­dat­ed Fund of India and is, there­fore, not rev­enue but pro­ceeds from busi­ness as defined under sec­tion 2(17) of the GST Act.

It is, there­fore, evi­dent that the Appli­cant is sup­ply­ing works con­tract ser­vice for an orig­i­nal work that is meant for com­merce and busi­ness. It does not, there­fore, sat­is­fy the con­di­tions laid down under Ser­i­al No. 3(vi)(a) of the Rate Notification.

The Applicant’s sup­ply of works con­tract ser­vice for con­struc­tion of the Mul­ti-modal IWT Ter­mi­nal at Hal­dia, there­fore, attracts GST at 18% rate under Ser­i­al No. 3(xii) of the Rate Notification.

In view of the fore­go­ing we rule as under

RULING

Amend­ments to Ser­i­al No. 3(vi) of Noti­fi­ca­tion No. 11/2017–CT (Rate) dat­ed 28/06/2017, brought about by Noti­fi­ca­tion No. 24/2017-CT (Rate) dat­ed 21/09/2017 and 31/2017 – CT (Rate) dat­ed 13/10/2017,  are not  applic­a­ble to the Applicant’s sup­ply of works con­tract ser­vice for con­struc­tion of the Mul­ti-modal IWT Ter­mi­nal at Hal­dia. It will attract GST at 18% rate under Ser­i­al No. 3(xii) of 11/2017–CT (Rate) dat­ed 28/06/2017.

This rul­ing is valid sub­ject to the pro­vi­sions under Sec­tion 103 until and unless declared void under Sec­tion 104(1) of the GST Act.