GST update on different rulings on exemption to sub-contractors 48/2020-21

The present update seeks to discuss about the different rulings pronounced by the Authority for Advance Rulings as regards availability of exemption to sub-contractors when the services provided by the main contractor are exempt. There have been divergent rulings depending on the language of the exemption entry applicable for the main contractor as in case of exemption notifications, the principle of strict interpretation is applicable.

Firstly, we shall discuss the ruling pronounced by the Rajasthan AAR in the case of M/s The Sunrise Construction Company wherein the party entered into an agreement with the Government of Rajasthan for construction of 270 flats as per affordable housing scheme under Pradhan Mantri Awas Yojana (PMAY). It sublets the construction work to another person under a separate work contract. The said person entered in a sub-contract with the applicant for ‘Pure labour Service’ in the said project. The applicant has sought advance ruling on whether GST is exempt on such pure labour sub-contracts under PMAY? The Authority for Advance Ruling observed that as per exemption notification, services provided by way of pure labour contracts of construction, erection, commissioning installation, completion, fitting out or any other original works pertaining to the beneficiary-led individual house construction or enhancement under Pradhan Mantri Awas Yojana are exempted from GST. The scope of the notification is not person-centric but project-centric. The said notification does not refer to contractor or subcontractor but to the supply of pure labour services by way of construction under certain project. It clearly sets out that whosoever is supplying the pure labour contract services for the construction of a civil structure or any other original works under PMAY is exempted from GST. The Authority for Advance Ruling held that the services supplied by applicant by way of pure labour contract for the construction of flats under Pradhan Mantri Awas Yojana are exempted from GST.

Coming to the ruling pronounced by the Karnataka AAR in the case of M/s Nurserymen Cooperative Society Ltd wherein the applicant has received contract from Government departments like BBMP and KSRTC for undertaking gardening and landscaping activities. In order to execute the work, the applicant has engaged sub-contractors. The sub-contractors bill the applicant for the gardening and landscaping work done at the government departments. The applicant in turn bills the Government department in terms of the contract given to them. The issue to be determined is whether the supply of services by the sub-contractor to the applicant for executing the gardening and landscaping work for government departments is exempt from GST.

In the instant case, the issue being examined is whether the services supplied by the subcontractors to the applicant, who is the recipient of the services, is exempted from GST. The entries under Sl. No 3 and 3A above will apply only if the recipient of services is a Government (central/State/UT) or local authority or a Governmental authority or a Government Entity. In this case, the applicant who is the recipient of the supply from the sub-contractor is a Cooperative Society and not an entity specified in Sl. No 3 and 3A. When this criterion of the Notification is not satisfied, the sub-contractors as suppliers of service, will not be eligible for the exemption under the entries 3 or 3A of the above said Notification. It is a well settled law that exemption notifications are to be interpreted strictly as to their eligibility. One cannot be influenced by extraneous factors while determining a person’s eligibility to an exemption notification. Therefore, on a strict interpretation of the entry Sl.No3 and 3A, the authority held that the supply of services by the subcontractors to the applicant is not eligible for the benefit of exemption under either SI..No 3 or 3 A of Notification No 12/2017 CT(R) dated 28-06-2017.

We have also discussed in our earlier update on the case law pronounced by the Karnataka AAR in the case of M/s MV Infra Service Pvt Ltd. (PJ/Case Law/2020-2021/3556) where the applicant was engaged in provision of composite works contract services of erection, foundation, electrical works & painting of communication towers and their maintenance. They are expected to get sub contract work, of imparting training of soft skill development to Engineers, ITI students, Building and other construction workers, from the main contractor exclusively engaged in skill development training & are likely to get the main contract work. The applicant raised the question before the authority as to the applicability of the entry No.69 or 72 of the exemption Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 on the sub contractor. Certain conditions for the entitlement of the said exemption which were discussed under the case are as under:-

a) The services must be related to/ under any training programme.

b) The services must be provided to the Central Government, State Government and Union Territory Administration.

c) The total expenditure for the said training programme must be borne by Central Government, State Government and Union Territory Administration.

In the present case on hand though the services to be provided by the applicant would be under training programme for Recognition of Prior Learning (RPL) to construction workers, the services would be provided to the Main Contractor i.e. the recipient of the services would be the Main contractor, but not the State Government. Therefore, the rate of 18% GST is applicable on services to be provided under sub-contract to main contractor, who in turn provides to M/s Maharashtra State Skill Development Society, in respect of training of Building and other construction workers (skill development training) and the SI. No. 69 or SI. No. 72 of the notification 12/2017- Central Tax (Rate) New Delhi, dated 28th June, 2017 are not applicable to the applicant.

The point to ponder here upon is that if the exemption is not available to the subcontractors, then the GST paid by the main contractor on the inward supply from the subcontractors will become a cost to them since they will not be eligible to avail the input tax credit of the tax paid on the inward supply, for the reason that the output supply made by them to the Government Department is exempted. However, in our opinion, the government should re-consider the admissibility of exemption to sub-contractors as the non-availability of ITC is the cost passed on to the recipient thereby defeating the purpose of exemption granted to the main contractor.

This is solely for educational purpose.

You can reach us at www.capradeepjain.com , at our facebook page on https://www.facebook.com/GSTTODAYBYPRADEEPJAIN/ as well as follow us on twitter at https://www.twitter.com/@capradeepjain21 .

Comments

GST update on different rulings on exemption to sub-contractors 48/2020-21

Post a Comment

Query