To contain the spread of Coronavirus, the Central and state governments took mandatory possession of various hotels, inns, etc. across the country. They were converted into quarantine centres. As per the government’s directions, diagnosed patients and people with foreign travel history were kept at these quarantine centres.
Analysis of income and expenses of quarantine centres
During the quarantine period, the government was managing the hotels and inn premises. The hotels were incurring recurring expenses such as electricity, water bill, staff salary, etc., but in return, they were earning nothing. Thus, the owners of these hotels and inns filed compensation claims with the government.
Applicability of GST on compensation received by quarantine centres
The question which arises here is whether GST applies to such claims filed by the owners. There are two interpretations:
(A) Not to be treated as a supply:
As per the Central Goods and Service Tax Act, a transaction attracts GST if it gets covered under the definition of supply. As per section 7 of the CGST Act, term supply includes “all types of supply of goods/services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed for consideration by one person to another in the course of furtherance of business”.
The above definition is an inclusive one. It has two important aspects:
- Consensus between parties: There should be an agreement between the parties to contract.
- Consideration: There must be a consideration agreed upon by parties to contract.
In the current situation, the hotels and inns’ owners were obliged to follow the Central and state government’s orders. They took possession of their premises for using them as quarantine centres. They had to follow the instructions of the government merely. There is no consensus involved. Also, there is no consideration involved. Thus, in the absence of both the aspects of supply, i.e. consensus and consideration, this transaction cannot be termed as “supply”.
However, the owners would be seeking compensation for the loss of revenue and recurring expenses incurred. Here, the term compensation is far different from consideration. Consideration is received for the sale of goods or services, but here compensation is received for revenue loss due to forced possession of its premises.
Thus, based on the points above, it can be construed that the government’s compensation to the owners of such hotels and inns is not subject to GST.
(B) To be treated as a supply:
Despite the above points, the department may have a different view and treat it as a supply transaction. But, notification number 12/2017 Central tax dated 28th June 2017 exempts GST on pure services. Pure services are services provided to Central/state government, a Union Territory or a local government body in relation to any function specified under article 243W of the Constitution. This article specifies the following functions:
- Urban planning
- Regulation of land use and construction of buildings
- Any work-related to socio-economic development
- Building infrastructure facilities like roads and bridges
- Any work-related to public health facilities
Thus, even though the department may consider it a supply transaction, it would be exempt from GST. It is a “pure service” provided to the Central or state government and is also covered under the list of activities specified under Article 243W. It will come under the exempt category of supply.