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GST on BOT HAM projects

Updated on :  

08 min read.

The GST rate of 12% leviable on annuity payments of BOT-HAM projects will have the most negligible impact on the project cash flows, stated ICRA on 29th September 2021. Taxpayers always contented taxation treatment of the annuity payments before the authorities.

However, the Central Board of Indirect Taxes and Customs (CBIC) clarified the matter on 17th June 2021 through CGST Circular 150/2021. The same was notified vide a policy circular by the National Highways Authority of India (NHAI). This article provides further details on the taxation of BOT-HAM projects.

Understanding BOT-HAM projects and transactions under scanner

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 first two work on a Public-Private Partnership (PPP) model with all risks and revenue earning on the roads lying with the private players. The extent of risk reduces with the annuity model. The EPC is not a PPP model with the government bearing all risks and private players departing once the development is complete.

The HAM model has features of both EPC and BOT-Annuity models. The NHAI awarded HAM projects for constructing and developing Indian highway roads more recently. The project was instituted in FY 2016-17 with a budgeted spend of Rs.36,000 crore. 

The government invested 40% of the project cost in five instalments based on a percentage of completion method. At the same time, the balance came in from the private developer. A payback period of 15 years was fixed for the private players to recover their investment. 

The highway toll tax was to be collected by the government and not private players. The move helped private players to participate in the Public-Private Partnership (PPP) as highway developers. 

They received periodical payments (up to 20 years) under the contract from the government in return. Further, it was a win-win situation for the government as the risk got distributed. The government chose such a player who made the lowest bid of the minimum annuity. The risk for the private player is minimal.

Hence, the following are the transactions on which GST treatment had to be decided:

  • Government Grants (40%) during the development period
  • Operations and Maintenance (O&M) during the operational period
  • Annuities paid by the government to private developers during the operational period

Taxation of GST on BOT-HAM projects

The construction of roads is covered by the HSN code or SAC 9954. The service of access to a road or a bridge on toll payment is exempt, covered by service code 9967. So, irrespective of consideration as toll or annuity, access to the road is tax-exempt. Therefore, no GST is charged on the toll collected.

However, the exemption does not cover the construction of road services, whether or not payment is made via deferred payments or annuities. These are clarified in the CGST Circular 150/2021 issued on 17th June 2021. 

The private developers raise invoices and receive annuity payments from the government department, including GST, deposited with the tax authorities. GST at 12% is chargeable on annuities paid to private developers, which the private developers must deposit.

For projects bid between 1st July 2017 and 13th October 2017, the NHAI will not be reimbursing GST on annuity due to the clarification since the bids invited included GST.

The NHAI’s Circular dated 1st September 2021 and the ICRA’s statement

The NHAI issued a Circular on 1st September 2021 to clarify certain matters. Many private developers felt that the GST liability was too much for the sector to bear.

However, the Circular stated that NHAI would reimburse the additional GST, being net impact on an annuity for Input Tax Credit (ITC) to the private developers, also known as concessionaire being eligible for grants, due to legal updates for projects bid on or before 30th June 2017, and between 14th October 2017 and 16th June 2021.

The grant holders or concessionaires can use the unutilised ITC while the construction is going on to set off the GST liability on annuity payments received during the operational period.

The ICRA, a credit rating agency, has stated that the clarification will have a low impact on the project cash flows of private developers. The concessionaires may use the accumulated ITC during the development period to set off the GST payable on the annuity payments received during the operational period.

Therefore, the impact of GST payable on an annuity can be assumed as limited on the project return data with cash outflow on GST liability remaining restricted to the last three-year period of operations.

The statement further added that the NHAI’s Circular clarifies that it will reimburse the concessionaire any additional payable amount, which is the net impact on annuity after adjusting ITC for project bids on or before 30th June 2017 and from 14th October 2017 to 16th June 2021.

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