Composite supply of civil works undertaken for local authority warrants for lower GST rate as per notification issued: AAR

An advanced ruling is a mechanism whereby taxpayers can get answers or clarifications regarding supply of goods and services, directly from tax authorities and the primary objectives for such a mechanism are to reduce litigation, attract FDI due to transparent tax liability, provide certainty with respect to tax liability and disclose ruling in an inexpensive and transparent manner. The Authority for Advanced Ruling (AAR) constituted by the tax authorities interprets tax laws for the taxpayers and it was created to address any issues faced by taxpayers and assist them by providing a decision on the clarification sought. The AAR’s appellate authority is the AAAR (Appellate Authority or National Appellate Authority for Advanced Ruling). Section 95 to Section 106 in Chapter XVII of CGST Act covers the procedures and rules related to advance rulings. An application is made by the taxpayer on the clarification sought by them. The taxpayer is provided an opportunity of being heard by the AAR. If there is consensus on resolution on the clarification sought between the AAR and taxpayer, an ‘Advance Ruling’ is issued by the AAR and on the contrary, the matter is referred to the AAAR.

The question of law which is address through this AAR is as follows:

• Whether the civil constructions undertaken by a registered entity involved in construction business is entitled to lower GST rate as per notification issued on works contract supply undertaken for local authority.

Facts of the application made to AAR, by taxpayer ‘M/S. Tirupathi Construction, (applicant)’, dated 12.Mar 2021:

The applicant, M/S. Titupathi Construction is into the business of civil construction and had entered into an agreement with Panchayat Vibhag (Marg and Makan Road), Valsad, District Panchayat basis a tender floated by them. The contract was for the construction of a ‘fish market’ for the Panchayat at Umargam Taluka and involved the entire of gamut of civil works including excavation of the site, building which involved masonry work and painting and sewerage and other sanitary works. The value of the contract amounted close to INR. 50 Lakhs.

The applicant contended that the civil works rendered for the Panchayat amounted to supply as per Section 7(1)(a) read with Section 2(102) of the CGST Act, 2017 and is chargeable to GST under Section 9 of the Act. The applicant further contended that their work involved works contracts, where they had to transfer the property to be developed to several sub-contractors for performing and executing their sub-contracted works. Notification number 11/2017-Central Tax (Rate) dated 28-Jun-2017 was issued and entry 3(vi) provided the rate of GST to be charged for such composite supply of goods and services rendered to Central / State or local authorities to be 12%. The Panchayat (Road and District Department), Valsad District Panchayat, Government of Gujarat has also issued a letter to the applicant that the civil construction undertaken is not with any profit motive and therefore cannot be construed for business or profession and hence gets classified under entry 3(vi) of Notification No. 11/2017. Further the applicant has stated that as per mandatory functions to be performed by any Panchayat as given under Section 243G of the Constitution of India, ‘Fisheries’ is also one such activity and since it is a supply to a local authority, it gets classified under entry 3(vi)(a) of Notification No. 11/2017 and the GST rate applicably for this supply would be 12%. The applicant sought confirmation in this regard with the AAR.

Observations and final ruling by AAR vide Order No. GUJ/GAAR/R/19/2021 dated 30 Jun 2021:

The AAR acknowledged the presentations made by the applicant and reiterated the clarification sought by the applicant. The personal hearing for the applicant was held on 15.Jun.2021and listed the criteria’s to become eligible under entry 3(vi)(a) of Notification No. 11/2017-Central Tax(Rate) dated 28.Jun.2017 as below.

• The supply should be a composite supply involving a works contract
• Supply should be to Central / State governments or Union territories or a local authority or a government authority/entity.
• The civil construction on completion should be not for business, commerce, industry or profession.

The AAR acknowledged that the applicant clearly fulfills the first two criteria’s. As for the third criteria, the AAR opined that the activity undertaken by the applicant for the Panchayat will not fall under Section 243G of the Constitution of India, as sale of fish in a fish market which is the civil construction to be executed, does not fall under the definition of ‘Fisheries’. Further the AAR opined that the works undertaken by the applicant would be classified under Entry 22 – ‘Markets and Fairs’ of the 11th Schedule of the Constitution and further acknowledged that the works is not meant for business or commerce and ‘predominantly used for other than commerce, industry, or any other business or profession.

The AAR hence concluded that the said works undertaken by the applicant does qualify for classification under entry 3(vi)(a) of Notification No. 11/2017 and the GST rate applicably for this supply would be 12%.

To Read the Ruling Download PDF Given Below :