MARCH 05, 2019

By K Srinivasan, IRS

NOTIFICATION No.1/2017-CT (Rate) prescribes 5% GST on supply of windmill or wind operated electrical generator (WOEG)/Solar Power Generating System (SPGS).

Notification 11/2017-CT (Rate) provides a rate of 18% GST on the supply of works contract service and Section 2(119) and Section 7 of the CGST Act read with Para 6(a) of Schedule II to the CGST Act, treats works contract service as a composite supply.

Works contract, as defined under Section 2(119) of the Act is understood to be a contract for building construction, erection, installation, commissioning etc. of any immovable property wherein the said Act kicks in to specifically deem works contract as a composite supply of service.

Every windmill / solar generator supplied, needs to be erected, installed and commissioned in addition to being delivered with adjunct facilities for transformation and distribution of electricity so produced, with the help of sub-stations including sometimes securing access way to the erection site

In short, they are EPC contracts, resulting in construction of immovable property, considering the extent or degree of annexation, finding itself under Works contract attracting 18% GST.

The only way toun-latch from a composite supply of works contract incase of these wind/solar power-installations, is to bifurcate the contract into supply of WOEG / SPGS, to avail the concessional rate applicable to them at 5% and the remaining part of the installation into a pure service contract under works contract service at 18%.

An attempt was made by some taxpayers, resorting to classification of the entire contract as a composite supply by treating the power generation modules as the principal supply and thereby sinking the service part into it.

This is with a view to deeming it as a composite supply of goods thereby effacing the identity of service to claim an effective rate of 5% applicable to those goods, on the entire value of the EPC Contract.

This triggered chaos and the AARs/AAARs rightly took cudgels at this proposition and hailed the entire value of the EPC contract as a composite supply of Service namely works contract service, chargeable to 18%. That is how both the baby and the bath water were lost.

The smartness of a few had upset the applecart completely, taking away even the little advantage accruing from a concessional rate of 5% on the value of the power generating modules ending up with having to pay 18% on the total value of the entire EPC contract.

This called for extra judicial intervention of Notification No.27/2018-CT (Rate) dated 31.12.2018 by inserting a new entry at Sl.No.38 of Notification No.11/2017-CT (Rate) dated 28.6.2017, that prescribed 18% for supply of construction or engineering or installation or technical services in relation to supply of WOEG/SPGS.

An explanation was added further to the above entry that required a conjoint reading of Serial Number 234 of Notification No. 1/2017 CT-(Rate) dated 28.6.2017 with the above read entry.

Thus, a deeming fiction got created in this fashion with reference to the value of goods specified under serial number 234, in case where such goods are supplied along with other goods and services including the services mentioned under the newly embodied Serial Number38 of Notification No.11/2017-CT Rate dated 28.6.2017.

By this arrangement, the value would be taken at 70% of the total consideration charged to represent the power plant and would be subject to GST at 5% and the remaining 30% of consideration charged, to represent the specified services in relation to putting up the power plant and charged to 18% vide Serial number 38 of Notification No.11/2017-CT Rate dated 20.6.2017 as amended by Notification No.27/2018-CT (Rate) dated 31.12.2018

We can juxtapose here another issue regarding Multi-modal transportation that was faced by the Logistics Sector, post GST, to draw a parallel from, to support the present discussion on Composite supply.

In a multimodal transport scenario, involving road–water–road vis-a-vis road–rail–road, the road transport is chargeable to 5% GST while rail transport is 12% and water transport is both Nil and as well as 18%,depending upon whether it is Inland water transport or Coastal transport.

Wherever, a composite multimodal transport of road-rail-road had to be executed, the service providers were caught on the wrong foot of having to subject the entire transportation to higher rate of 12% applicable to rail transport vis-a-vis road-water-road transport either squaring off at 5% or zooming off to 18%, since there was vast rate difference within the competing services in that model.

The moot point here was whether to treat the multimodal transport as a mixed supply or a composite supply.

If you ask the question whether it is naturally bundled, perhaps it is not.

But, even assuming it is naturally bundled, which is the principal supply - rail or road, is the next question?

If you go by the dominant nature test, it will be unarguably the rail transport/ Coastal transport, which means the entire contract will have to be levied at the higher rate of 12%/18% as the case may be with a natural exception of road-water-road model chargeable to 5% due to the inherent presence of Inland water transport component in it being totally exempted.

If it is not regarded as a composite supply because sometimes one can argue that it is the transporter who is trying to club different modes of transport into a single contract artificially and, therefore, it is a mixed supply, then also it will turn out to be the highest rate applicable among the components of the mixed supply which is rail transport at 12% or coastal transport at 18%.

What is the way out here? was the dilemma.

Whereas, in the case of road-water-road transport model, the rate of tax for coastal transport being 18%, it compels the taxing authority, not to let the classification be twisted any which way, to get the lower rate.

There again, if one changed the rail/coastal leg of the transport in the name of the consignee, and claim back to back reimbursement, then it will become a standalone rail/coastal transport attracting 12%/18% as the case may be, in the hands of the consignee or temporarily in the hands of the consignor but later on recouped/reimbursed from the consignee on a pure agency principle.

But in Logistics trade, strangely, if transport is not billed to the consignee straightaway but absorbed by the consignor into his account and rebilled to the consigned, whether a GTA service or a Rail transport/coastal transport, it will get classified as a general service transaction not elsewhere specified attracting 18% GST with ITC of course.

In the same manner, if the multimodal transporter absorbs costs of transport initially into his account and rebills the consignee he will have to charge 18% GST, regardless of the tax rates applicable to them originally as road, rail or water transport, and were,therefore,threatened to be out of business.

Here again, the Government had to intervene by the Notification route by inserting a new serial number 9 under Notification 13/2018-CT(Rate) dated 26.7.2018, defining Multimodal transport and fixing the rate of tax at a via-media rate of 12% with ITC, on a principal-to-principal basis, on both types of Composite supply without compromising or alteration of the definition of Composite supply.

But, strangely enough the above change would appear to lack the backing of a service classification code as in the case of Land, water or Air namely Heading 9965 Group 99651,99652 and 99653 respectively for Multimodal transport service, despite the extensive attempts to explain it under the new serial no 9 to Notification 11/2017-CT(Rate) dated 20.6.2017, fails to own a classification code for itself.

Coming back to what we started with, even in works contract transactions, if the materials are supplied directly under a separate contract and services are supplied under a stand-alone contract, it is not clear whether one would be allowed to bi-furcate the contract into goods and services and pay the applicable tax for the supply of goods and services, each of them separately.

All these kinds of ad hoc dispensations given to supply of Power plants, and Multimodal transport service which are still not free from being construed as a composite supply as per the Interpretative Rules, are bound to fail a domain specific classification test and hence has the potential to trigger legal disputes, in future.

The Indian Constitution rightly provides for any bifurcation of composite contracts under Art 366 (29A) into goods and services separately, which is still in force even after the introduction of the 101 st Constitutional Amendment Act, 2016 to put in place GST.

But the Subordinate Legislators of Central Excise and VAT and lately GST would not relent and continue to create perennial problems in this sphere of taxation.

Going back in time, the first time ever a composite turnkey contract of logistics hit the road block, was in service tax regime.

Then it was argued that contract will not be allowed to be vivisected but, however, along the lines of the present EPC/ works contract, abatement of 85% was granted, of the gross value and on the remaining 15% value, appropriate Service tax was charged as per the clarification given by the Ministry of Finance vide F.No. 343/1/97-TRU dated 6.6.1997.

It is noteworthy to mention that the forty sixth Amendment Act of the Constitution validating bifurcation of contracts into goods and services through Article 366(29A) came into effect even as early as 1982 and, therefore, the Board had no compulsion to take the above stand in its circular cited supra.

But, subsequently there was a scramble to tax composite supplies of goods and services by both the Centre and the state to the extent of encroaching on each other's taxing jurisdiction.

Finally, the Apex court had to come to the picture to circumscribe each other's taxing territory by the dictum of BSNL judgment - 2006-TIOL-15-SC-CT-LB that the cost of goods shall not be included in the value of services and as also the value of services in the cost of goods.

We have thus, done a full circle if you have noticed, to arrive at the same point where we started with reference to the solar power plants/EPC/Turnkey Contracts, which involves, as everyone knows, extensive technical services of erection, installation, commissioning including the evacuation system for handling distribution of power generated with the help of WOEG/SPGS.

By resorting to the notification route to iron out the above mentioned differences surrounding the correct classification of the above composite supplies without attempting to put a firm policy to classify the services and define them appropriately so as to arrive at conclusion of disputes of the above nature outlined in great detail, has only led to more disputes and litigation in the recent times.

It is in the larger interest of the taxpayers that the present deeming fiction of treating works contract of Immovable property as a composite service is given up and as also in other cases of composite supply, in preference over a prudent method of allowing all composite contracts involving both materials and labour to be scientifically bifurcated and charged to appropriate tax as per their parent classification and tax structure.

Such a dispensation aims definitely at a win-win situation to both the Government and the taxpayers alike and would be also viewed compliant with Article 366(29A) of the Constitution, which can become active from its plaintive state now.

It is said that the policy makers are either brand new or lack the opportunity of past experience or unwilling to acquaint with the past history of Indirect Taxation to imbibe the basic principles involved in policy making.

Let us hope and pray that the Legislators are more receptive to the changing needs of Indian business and pay more attention to the genesis and evolution of Indirect Tax Laws to devise such sound Policies so that a smooth run of GST is guaranteed.

And that will surely benefit taxpayers across myriad goods and services sectors of the country besides being beholden to turning the myth of one tax, one nation and one market, into a virtual reality.

(The author is Assistant Commissioner, GST, Chennai and a Master Trainer, GST. The views expressed are strictly personal.)