Goods and Services Tax on Hybrid Annuity Model (HAM) and Build-Operate-Transfer (BOT) Infrastructure Projects

The Indian credit rating agency, ICRA, announced on September 29, 2021, that the 12% Goods and Services Tax (GST) applied to annuity payments for Build-Operate-Transfer (BOT) and Hybrid Annuity Model (HAM) projects would have a minimal effect on project cash flows. Previously, taxpayers frequently disputed the tax treatment of these annuity payments with authorities.

However, the Central Board of Indirect Taxes and Customs (CBIC) provided clarification on June 17, 2021, via CGST Circular 150/2021. The National Highways Authority of India (NHAI) subsequently issued a policy circular disseminating this clarification. This article explores the specifics of GST application to BOT-HAM projects.

Understanding BOT-HAM Projects and Taxable Transactions

Road development projects in India are categorized into several models: Build-Operate-Transfer (BOT) toll, BOT-Annuity, Engineering, Procurement and Construction (EPC), and Hybrid Annuity Model (HAM).

The BOT toll and BOT-Annuity models operate under a Public-Private Partnership (PPP) framework, where private entities assume all risks and revenue generation from the roads. The annuity model mitigates some of this risk for private players. In contrast, the EPC model is not a PPP, with the government bearing all risks, and private players complete their involvement once construction concludes.

The HAM model combines features from both EPC and BOT-Annuity structures. The NHAI has recently granted many HAM projects for highway construction and development across India, with the program commencing in FY 2016-17 and a budget of ₹36,000 crore.

Under the HAM model, the government contributes 40% of the project cost through five installments, based on the percentage of work completed. The remaining investment comes from the private developer. Private players are given a 15-year period to recoup their investment.

In this model, the government, rather than private entities, collects highway toll taxes. This arrangement encouraged private participation in PPP highway development, as private developers received periodic payments (spanning up to 20 years) from the government under the contract. This distribution of risk created a mutually beneficial situation for the government. The government selected bidders who offered the lowest minimum annuity, thereby minimizing risk for the private developers.

Consequently, GST treatment had to be determined for the following key transactions:

• Government grants (40% of costs) during the development phase.
• Operations and Maintenance (O&M) activities during the operational phase.
• Annuity payments from the government to private developers during the operational phase.

GST Application to BOT-HAM Projects

Road construction falls under HSN code or SAC 9954. Services providing access to a road or bridge via toll payments are exempt from GST, covered by service code 9967. Therefore, regardless of whether payment is a toll or an annuity, access to the road itself is tax-exempt, and no GST is levied on collected tolls.

However, this exemption does not extend to road construction services, even if payments are structured as deferred payments or annuities. This distinction was clarified by CGST Circular 150/2021, issued on June 17, 2021.

Private developers issue invoices and receive annuity payments from government departments, which include GST. This GST amount must be remitted to the tax authorities. A 12% GST is applicable to annuities paid to private developers, and they are responsible for depositing this tax.

For projects where bids were placed between July 1, 2017, and October 13, 2017, the NHAI will not reimburse GST on annuity payments because the original bids had already factored in GST as per the clarification.

NHAI Circular of September 1, 2021, and ICRA's Assessment

On September 1, 2021, the NHAI released a Circular to provide further clarity, addressing concerns from many private developers who felt the GST liability was burdensome for the sector.

The Circular specified that the NHAI would reimburse private developers (concessionaires eligible for grants) for the additional GST amount, representing the net impact on annuities after accounting for Input Tax Credit (ITC), due to legal changes. This reimbursement applies to projects bid on or before June 30, 2017, and those bid between October 14, 2017, and June 16, 2021.

Concessionaires or grant holders can utilize accumulated unutilized ITC from the construction period to offset their GST liability on annuity payments received during the operational period.

ICRA, a credit rating agency, assessed that this clarification would have a minimal effect on private developers' project cash flows. Concessionaires can leverage their accumulated ITC from the development phase to manage the GST payable on annuity payments during operations.

Therefore, the financial impact of GST on annuities is expected to be limited on project returns, with cash outflows for GST liability primarily concentrated in the final three years of operations.

ICRA's statement further confirmed that the NHAI's Circular clarifies reimbursement for any additional payable amount to the concessionaire. This amount is the net impact on the annuity after adjusting ITC for projects bid on or before June 30, 2017, and between October 14, 2017, and June 16, 2021.