Recent NHAI Clarification on GST – Sigh of Relief for Road Contractors

Introduction to HAM

Construction of National Highways (NH) and other infrastructure projects are very much instrumental in the growth of our economy but at the same time, it is a very costly proposition. Realising the needs of the Indian economy and budget constraints, road construction projects are jointly developed by the governments in partnership with Private Sector Projects (PPP) under various models viz. Engineering, Procurement and Construction Contract (EPC), Build Operate and Transfer (BOT) Model, and Hybrid Annuity Model (HAM). There was a cloud of uncertainty on the taxability of other models under GST regime except for HAM.

In HAM a certain percentage of the project’s cost (say appx. 40%) is paid by NHAI (National Highways Authority of India) or various state authorities to the concessionaire (contractor) at pre-agreed milestones during the construction period, while the balance payment along with payments for maintenance would be paid proportionately over a period of 7–15 years post-construction along with interest. Therefore, one could say that HAM is a combination of EPC and BOT Models.

In this paper, the paper writer has discussed the grey area of taxability of annuity received by the concessionaires from the Government/NHAI in the execution of road projects under HAM.

Taxability of Road Projects – Service Tax vs GST Regime

During the Service Tax regime, services provided by way of construction or alteration of a road, bridge, tunnel, or terminal for road transportation for use by the general public were exempt1 from the levy of service tax. Whereas, in GST works contract services by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a road, bridge, tunnel, or terminal for road transportation for use by the general public are leviable to GST at the concessional rate of 12%2.  Further Sl. No. 23 of Notification No. 12/2017-CTR dated 28.06.2017 exempts service by way of access to a road or a bridge on payment of toll charges.

It is to be highlighted that there is a fundamental difference between toll charges and annuity inasmuch as toll charges are paid by actual users of the road whereas annuity is paid by NHAI/other government authorities. Further toll charges are linked to the usage of the road whereas annuity payments are linked to the construction and maintenance of roads. It is important to note that the right to collect annuity from NHAI and the right to collect toll are mutually exclusive. In all arrangements where NHAI has agreed to pay an annuity, concessionaires lose the right to collect toll from users. Due to these fundamental differences since the beginning of the GST regime, there was a cloud of uncertainty over the taxability of annuity payments received by concessionaire towards construction and maintenance. Toll collected by concessionaire is exempted from GST since inception whereas no such exemption exists for annuity receipts.

With the above background, we must now focus on certain basic GST provisions as applicable to HAM.

Time of supply of services under HAM

On a harmonious reading of terms of the tender, concession agreement, and definition of continuous supply of services3, time of supply and invoicing related GST provisions4, it is possible to take a view that in the case of road construction services time of supply shall arise on completion of the milestone as per concession agreement. Further, in respect of annuity payments, due date of such payments is linked to Commercial Operation Date (COD) and therefore, the due date of annuity can be easily ascertained from the concession agreement. Accordingly, time of supply shall arise only on such due date. 

Appreciating GST issues faced by concessionaires, GST Council has taken up their issues for discussion during 22nd GST Council meeting. Let us now examine whether GST council has provided clarity on such issues or complicated it further?

Disconnect between Extract of Minutes of 22nd GST Council Meeting & Notifications

Published Minutes of the 22nd GST Council meeting reads as under:

“After discussion, the council decided to treat the annuity at par with toll and to exempt from tax, service by way of access to a road or bridge on payment of annuity.

Pursuant to the above recommendation, entry 23A was inserted in Notification No. 12/2017-CT(R)5 and Notification No. 9/2017 – IT(R), both dated 28-06-2017. Said entry exempts “Service by way of access to a road or a bridge on payment of annuity”. 

It would be important to highlight that GST Council has recommended exemption from GST on annuity received by concessionaires for the construction of roads. However, Notification issued by the Central Government provided exemption only on payment of GST on annuity payment for ‘services provided by way of access to a road or a bridge’. This view also finds support from the fact that HSN 9967 is mentioned against the aforesaid exemption entry. As per explanatory notes to the scheme of classification of services, heading 9967 refers to “operation services of highways, roads, streets, and causeways”. Whereas heading 9954 refers to “general construction services of highways, streets, roads railways, airfield runways, bridges, and tunnels.”

 Controversy created by above Notifications

A question that arises in everyone’s mind is whether annuity in road projects is paid as a belated consideration for construction services or towards operation and maintenance of roads? If the former view is presumed to be correct, then, such annuity is taxable as explained above. If the later view is presumed to be correct, then, such annuity enjoys exemption from entry no. 23A (supra).

Stand taken by the Industry Post 22nd Council Meeting

Relying on the above notification, the industry presumed that annuity paid by NHAI and other authorities to concessionaires for the construction of public roads is exempt from tax. Accordingly, concessionaires have adopted the following strategy for charging GST on their outward supply.

During the Construction phase, road construction services were treated as Works contract services6 and appropriate GST was collected and paid. Whereas, consideration received during O&M (Operation and Maintenance) phase by way of annuity payments were treated as services provided by the concessionaire by way of access to the road or bridge and therefore presumed as exempt from GST.

Further, this view was also endorsed by NHAI circular (3.3.17) dated 23.10.2017. Vide this circular NHAI has taken a stand that no payment against GST shall be made by NHAI on annuity payments. This view is uniformly adopted by other state authorities. 

After the aforesaid Notification and Circular from NHAI, industry players were relieved of taxation anxiety. However, taxation and anxiety go hand in hand. Taxability and ITC issues of concessionaires were raked up by Advance Ruling Authority. 

Controversy buttressed by Advance Ruling

Rajasthan Advance Ruling Authority had occasion to clarify taxability of receipts under HAM in the matter of Nagaur Mukangarh Highways Pvt Ltd7. Shockingly authority rejected the exemption claim of the applicant in terms of entry no 23A (supra) in respect of annuity receipts and clarified that the applicant is liable to pay the applicable GST on the full value of the project during the construction period of two years. Further, it was held that the concessionaire is liable to pay GST at the time of issue of invoices or receipt of the payments, whichever is earlier. Consequently, applicant was allowed to claim full ITC qua such taxable supplies.

 Little relief from AAAR

Thankfully, Appellate Authority of Advance Ruling8 bifurcated consideration received by the concessionaire into 2 parts and formed a view that consideration relating to the construction phase is subject to GST under HSN 9954, whereas consideration relating to O & M shall fall under HSN 9967 and qualify for exemption under entry 23A(supra).  However appellate authority has taken a view that concessionaires shall reverse ITC proportionately taking into account consideration likely to be received for O & M Phase.

In the opinion of the paper writer stand taken by AAAR on the reversal of ITC is not in terms with Section 17 of the CGST Act. Gujarat High Court judgment9 has succinctly summarised the law in this regard by observing that credit entitlement is on the date of receipt of inputs when the output activity was wholly dutiable. Merely because the finished goods eventually became exempt later on, the credit availed on inputs that were contained in semi-finished/ finished goods state was held as not deniable.

Pain area emerged from the above rulings

In addition to basic confusion prevailing over taxability, Industry was very much perturbed over the ITC issues. It is notable that in terms of Section 17 of the CGST Act, ITC can be availed with respect to only taxable supplies. Further, GST law also provides for reversal of ITC of goods or services or both if used partly for effecting exempt supplies. Skeletons emerged post above rulings as varied practices were followed by industry players while reversing ITC in respect of perceived exempt annuity payments.

Industry was still coming to terms with the ratio of the above rulings. Meanwhile, in response to various representations, GST council has once again taken up issues of concessionaires in 43rd GST Council meeting. Unfortunately, till the time of publishing this paper minutes of 43rd GST council meeting is not available in the public domain.

CBIC Circular – a shocker for the Industry

Pursuant to the discussion in the 43rd GST Council Meeting CBIC has issued Circular No.150/06/2021-GST dated 17.06.2021 (hereinafter “Circular 150”). Said circular clarified that exemption under entry 23A is applicable only in respect of services covered under HSN 9967 and not under HSN 9954.  CBIC has expressed a view that the annuity received under HAM for road construction (ie HSN 9954) is not eligible for exemption under entry no. 23A and therefore subject to GST. In a way said circular has virtually taken away the benevolent view (of bifurcating consideration into construction and O & M phase) in the aforesaid AAAR. This circular has raked up once again the taxability and ITC issue of consideration linked to annuity receipt under HAM.

Skeletons tumbling out of the closet

Following legal challenges have come to the fore post-43rd GST council meeting:

  • Whether recommendation of the 23rd GST Council meeting to exempt annuity payments for the construction of roads binding on the Government?
  • Whether Government can disregard the recommendation of GST Council while issuing Notification? It would be appropriate to note that every notification issued by Central Government invariably carries a declaration “on the recommendations of the Council, hereby makes the following further amendments”.
  • Is it fair to treat toll charges and annuity differently, more so when GST Council minutes suggest a view that the council had the intention to bring annuity at par with toll charges?

Welcome Circular from NHAI

NHAI vide its Policy Circular No. 3.3.21/2021 dated 1st September 2021 has superseded its earlier circulars issued in this regard and has kind-heartedly clarified as under regarding the applicability of GST on the activity of Construction of Road

Road Projects having bid due date on or before 30.06.2017

  • For such projects, GST on annuity payments shall be made/reimbursed by NHAI considering a change in the law as per SOP dated 29.07.2019.
  • The impact of additional GST shall be computed after adjusting GST ITC lying with the concessionaire.
  • GST on interest on annuity payments shall be payable at the applicable GST rate in accordance with Section 15(2)(d) of the CGST Act.

Road Projects where the bid due date was on or after 1.7.2017 but on or before 13.10.2017

  • No GST shall be paid on annuity as bids were inclusive of GST

Road Projects where the bid due date was on or after 14.10.2017 but on or before 16.06.2021

  • For such projects also, GST on annuity payments shall be made/reimbursed by NHAI considering a change in the law as per SOP dated 29.07.2019
  • Impact of additional GST shall be computed after adjusting GST ITC lying with the concessionaire.
  • GST on interest on annuity payments shall be payable at the applicable GST rate in accordance with Section 15(2)(d) of the CGST Act.

Road Projects where the bid due date is after 16.6.2021

  • Since such bids are anyway exclusive of GST therefore concessionaire will not be subject to additional GST hit as such.
  • Further, it has also been clarified GST(TDS) shall be deductible from the annuity and interest on annuity payable on or after 17.06.2021
  • This clarification by the NHAI would be applauded by anxious road contractors and augment the opportunities for infrastructure development in India. A sequence of events for road contractors was like an interesting T-20 cricket match where every scoring shot or falling of wicket was tilting the balance in favour of opponents. Fortunately, the end result reaffirms the famous proverb ALL’S WELL THAT ENDS WELL.


The views expressed herein are strictly personal to the authors and should not be construed as advice/ legal opinion. The contents of this article are based on the interpretation of the facts, relevant legislation, rules, notifications, circulars, judgments/rulings, etc. on the date of publishing of this article.  One should not act upon the information in this article without obtaining specific professional advice. The authors are not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, or omission pertaining to this article. Further, the said article is only for information and guidance purposes and should not be construed as any kind of advertisement or solicitation of work.

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  1. Vide entry no. 13 of Notification No. 25/2012-Service Tax dated 20.06.2012 (mega exemption notification).
  2. As per Sl. No.3(iv) of Notification No. 11/2017-CTR dated 28.06.2017 – HSN 9954.
  3. Section 2(33) of the CGST Act.
  4. Section 13 and 31 of the CGST Act.
  5. Vide Notification no. 32/2017 – central tax (rate) dated 13.10.2017.
  6. Section 2(19) of the CGST Act read with Para 6 (a) of Schedule II to the CGST Act, 2017.
  7. 2018 (18) G.S.T.L. 652 (A.A.R. – GST).
  8. 2019 (23) G.S.T.L. 214 (App. A.A.R. – GST).
  9. Principal Commissioner Vs. M/s Alembic Ltd [2019-TIOL-1495].


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