Understanding GST Implications for Compensation Received by Quarantine Facilities

During the widespread Coronavirus pandemic, both central and state governments across the nation commandeered numerous hotels and inns, repurposing them as essential quarantine centers. These facilities housed individuals diagnosed with the virus and those returning from international travel, all under governmental directives.

Analysis of Quarantine Facility Income and Expenses

While these premises operated as quarantine centers, they were under government management. The hotel and inn owners faced ongoing operational costs, including utilities and staff wages, without generating revenue. Consequently, these property owners sought financial compensation from the government for their losses.

GST Applicability on Quarantine Centre Compensation

A key question arises regarding whether Goods and Services Tax (GST) is applicable to the compensation claims submitted by these property owners. There are primarily two different viewpoints on this matter.

Viewpoint 1: Not Constituting a Supply

Under the Central Goods and Services Tax (CGST) Act, a transaction is subject to GST only if it qualifies as a 'supply.' Section 7 of the CGST Act broadly defines supply to encompass all forms of goods or services, including sales, transfers, barters, exchanges, licenses, rentals, leases, or disposals, made or agreed upon for consideration by one party to another in the course or furtherance of business. This inclusive definition emphasizes two crucial elements:

• Consensus between parties: An agreement must exist between the contracting parties.
• Consideration: A mutually agreed consideration must be present.

In the scenario of quarantine centers, hotel and inn owners were legally compelled to comply with government orders, surrendering their premises for public use. Their actions were solely based on government directives, lacking any voluntary consensus or agreed-upon consideration. Therefore, without both consensus and consideration, this particular transaction does not meet the criteria of a 'supply.'

The payments sought by owners are for revenue loss and incurred expenses, which constitute compensation rather than consideration. Consideration is typically exchanged for goods or services, whereas this is indemnification for losses arising from mandatory government requisition. Consequently, it can be argued that the compensation provided by the government to these property owners should not be subject to GST.

Viewpoint 2: Treated as an Exempt Supply

Alternatively, tax authorities might interpret these transactions as a supply. However, even if deemed a supply, it would likely be exempt from GST under Notification No. 12/2017 Central Tax, dated June 28, 2017. This notification grants exemption to 'pure services' rendered to the Central government, state governments, Union Territories, or local authorities, particularly if these services relate to functions outlined in Article 243W of the Constitution. Article 243W lists various functions, including:

• Urban planning
• Regulation of land use and construction of buildings
• Work related to socio-economic development
• Building infrastructure facilities like roads and bridges
• Public health facilities

Therefore, regardless of whether the department classifies it as a supply, the provision of hotel premises for quarantine purposes aligns with 'pure services' provided to governmental bodies for public health functions specified under Article 243W, thereby falling under the exempt category of supply.