Taxability of Annuity Payments under BOT Model: A Legislative History

Jay Bohra – [2022] 139 taxmann.com 106 (Article)

1. What is BOT Annuity Model

The road projects in India are classified as Build-Operate-Transfer (‘BOT‘) toll, BOT-Annuity, Engineering, Procurement and Construction (‘EPC’) and the Hybrid Annuity Model (‘HAM’).

The BOT Annuity model is a Public-Private Partnership (‘PPP’) model for infrastructure projects especially road projects. Under BOT annuity, a developer/Concessionaire builds the highway, operates it for a specified duration and transfers it back to the government. The government starts annuity payment to the Concessionaire after the launch of commercial operation of the project. Annuity payments are usually made half-annually. The national highway projects contracted out by National Highway Authority of India (‘NHAI‘) under PPP model is a major example for the BOT model.

At the outset, let us understand the legislative history of taxability of annuity paid by NHAI/State Highways Construction Authority to Concessionaires for construction and Operation & Maintenance (‘O&M‘) of roads/highways.

2. Pre-GST regime

Under the pre-GST regime, works contract services by way of construction of road for public use was exempt from service tax vide Mega-Exemption Notification No. 25/2012-Service Tax dated 20.06.2012.

3. GST regime

3.1 In the 22nd GST Council meeting held on 06.10.2017, the GST Council decided to recommend CBIC to exempt the annuity paid by NHAI and State authorities or State-owned development corporations for construction of roads to concessionaires for construction of public roads. Based on such recommendation, CBIC exempted such annuity payments, vide Notification 32/2017-Central Tax (Rate) dated 13.10.2017, by inserting Entry 23A to Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 (hereinafter referred to as “Exemption Notification“). Relevant extract is provided herein below:

3.2 The taxability of annuity received in relation to construction of roads was challenged before the AAAR, Rajasthan in the case of Nagaur Mukundgarh Highways Pvt. Ltd. In re [2019] 103 taxmann.com 212 / 72 GST 797 / 23 GSTL 214 (AAAR-RAJASTHAN) wherein it was observed and decided as follows:

• • Annuity is an amount paid by the National & State Highways Construction Authorities to concessionaires for construction of roads in order that the concessionaire did not charge toll for access to a road or a bridge.
  • The GST council in 22nd GST Council Meeting decided to treat annuity at par with toll and to exempt service by way of access to a road or bridge on payment of annuity from tax, and hence entry 23A was introduced.
  • Whole project can be divided into two parts – one is construction phase and second is O&M phase
  • Activity of appellant having nexus with annuity is classifiable under SAC 9967 and activity of appellant having nexus with construction payments during construction phase is Works Contract which is taxable under SAC 9954. Therefore, held that there is no hitch in providing the benefit of Entry no. 23A to the annuity payments in relation to the road construction received after construction during the O&M phase.
  • Further held that only 50% ITC of the GST paid on the Input and Input Service used in construction phase is available to appellant since construction-related annuity payments, which was 50% of the construction payment, was an exempt supply and hence, proportionate ITC would be available during construction leg of project.

It is to be noted that insofar as exemption to annuities is concerned, the AAAR restricted itself to the construction-related annuity payments and did not discuss the taxability of annuity payments which are linked to O&M of the Project.

3.3 Post the foregoing ruling, representations were received by the GST Council from players engaged in Hybrid Annuity Model Project SPVs highlighting that this ruling prejudiced them inasmuch as it restricted ITC availment to a certain proportion owing to exemption on construction-related annuity payments and thereby adversely impacting their working capital and hence, putting them at a disadvantageous position vis-à-vis EPC and BOT Projects since ITC was fully available in such projects. The said issue was put up in the Agenda of the 43rd GST Council Meeting held on 28.05.2021 and it was decided by the GST Council that a clarification may be issued that annuity paid as deferred payment for construction of roads/highways was not exempted from GST as the annuity in lieu of tolls paid for access to road or bridge are.

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