Karnataka High Court stays retro tax call on annuity to infra companies

The Karnataka High Court has stayed proceedings initiated by the goods and services tax (GST) authorities seeking retrospective payment of tax on annuity to infrastructure companies.

The high court, on December 23, stayed the proceedings initiated after summons were issued by the authorities as well as the circular issued by the Central Board of Indirect Taxes and Customs (CBIC) in June clarifying that GST was leviable on annuity payments.

The high court's decision came in response to a writ petition filed by DPJ Bidar Chincholi (Annuity) Road Project Pvt Ltd.


A host of summons have been issued by the GST authorities since the issuance of clarification after the GST Council decided to exempt toll payments from GST.

Experts said the court's decision brings some hope to the sector hit hard due to the clarification.

"The stay order passed by the high court of Karnataka has given a ray of hope to the industry facing investigation by the Directorate General of GST Intelligence, on account of non-payment of GST on annuity received from the NHAI (National Highways Authority of India) and other state-owned corporations for construction of highways, to get final relief," said JK Mittal, advocate and GST expert.

Big blow
Under the hybrid annuity model, a portion of the total construction related amount is paid during the construction phase itself in instalments and balance on annuity basis. Since a portion of the construction related amount is deferred, as part of the annuity amount, interest is also paid to the contractor.

Another revenue model is recovery of toll charges on account of access to the roads. Before the GST regime there was an exemption provided to the above activities from service tax. When the GST was implemented, no exemption was provided. The issue was discussed in October 2017 at the 22nd GST Council meeting and a notification was issued, wherein toll charges were exempted from GST.

The industry has urged the government to review the circular.

On June 17, subsequent to the recent 43rd GST Council meeting, a circular was issued which provided that the annuity for construction related charges should be liable to GST and only toll charges had been exempted under GST.

According to the industry, however, the highways authority had communicated that annuity was also exempt based on its communication with tax authorities.

This meant payment of GST on annuity since the roll-out of the tax in July 2017. Tax authorities, acting on the clarification issued last June, began issuing notices and summons to road construction companies for recovery.