TDS notifications not apply to conseravncy and waste management service to a municipality-AAR
ABCAUS Case Law Citation:
ABCAUS 3039 (2019) (06) AAR
The Applicant was providing conservancy/solid waste management service to the Municipal Corporation (MC), which had been merged with another Municipal Corporation in terms of State Government Notification.
The claim of the applicant was that their services to the MC were exempt under Sl No. 3 of Notification No. 12/2017 – Central Tax (Rate) dated 28/06/2017 and the corresponding State Notification as amended from time to time (Exemption Notifications)
The MC, however, was deducting TDS while paying consideration for the above supply in terms of Notification No. 50/2018 – Central Tax dated 13/09/2018 and the corresponding State Notification (TDS Notifications) and insisted that the applicant needs to get himself registered under the GST Act.
The Applicant sought a ruling from the State GST Authority for Advance Ruling (AAR) on whether the notifications regarding TDS were applicable in his case and whether he was required to obtain registration under the GST Act even if he was making exempt supplies only.
Whether TDS notifications applies to conseravncy and waste management service to a municipality?
The Bench observed that in its Circular No. 51/25/2018-GST dated 31/07/2018 the Central Government clarified that the service tax exemption at serial No. 25(a) of Notification No.25/2012 dated 20/06/2012 (ST Notification) had been substantially, although not in the same form, continued under GST vide Sl No. 3 and 3A of the Exemption Notifications (Service). Sl No. 25(a) of the ST notification under the service tax exempts “services provided to the Government, a local authority or a governmental authority by way of water supply, public health, sanitation, conservancy, solid waste management or slum improvement and upgradation.” The Circular further explains in relation to the specific issue of ambulance service to the Government by a private service provider (PSP) that such service is a function of ‘public health’ entrusted to Municipalities under Art 243W of the Constitution, and, therefore, eligible for exemption under Sl No. 3 or 3A of the Exemption Notifications (Service).
The AAR opined that the above Circular leaves no doubt that the phrase ‘in relation to any function’, as applied to Sl No. 3 or 3A above, makes no substantial difference between Sl No. 25(a) of the ST Notification and Sl No. 3 or 3A of the Exemption Notifications (Service). Under the previous service tax regime, the exemption was limited to certain functions specified in Sl No. 25(a) of the ST Notification, whereas, under the GST the ambit has been broadened to include any such functions that are performed by a panchayat or a municipality under specific provisions of the Constitution. These functions are in the nature of public welfare service that the governments on their own, and sometimes through governmental authorities/entities, do provide to the citizens. When the activity is in relation to any such function, the supply to the governments or governmental authorities/entities or local authorities is exempt from paying GST under Sl No. 3 or 3A of the Exemption Notifications (Service), provided it is either a pure service or a composite supply, where supply of goods does not constitute more than 25% of the value.
The AAR opined that the applicant’s eligibility under Sl No. 3 or 3A of the Exemption Notifications (Service) should be examined from three aspects: (1) whether the supply being made is pure service or a composite supply, where supply of goods does not exceed more than 25% of the value of the supply, (2) whether the recipient is government, local authority, governmental authority or a government entity, and (3) whether the supply is being made in relation to any function entrusted to a panchayat or a municipality under the Constitution.
It was noted that the recipient was a municipal corporation, which is a local authority as defined under section 2(69) of the GST Act. ln the agreement, the Applicant was responsible for collection, segregation, storing, transport and disposal of municipal solid waste from the municipal area of the MC. They will organize a house-to-house collection of municipal solid waste, collect waste from slums, hotels, slaughterhouses etc. They will segregate the non bio-degradable and inert waste and dump it at the Landfill within the Project premise. The Applicant may build a suitable Processing and Composting Plant. The Applicant shall bear the expenditure for maintenance of the collection equipment and pay rental on the equipment taken on lease from the BMC. The consideration to be paid measures the work done in terms of the quantity of the garbage lifted and removed. Based on the above document, it may, therefore, be concluded that the Applicant’s supply to MC was pure service.
Furthermore, Article 243W of the Constitution that discusses the powers, authority and responsibilities of a Municipality, refers to the functions listed under the Twelfth Schedule as may be entrusted to the above authority. Sl No. 6 of the Twelfth Schedule refers to public health, sanitation, conservancy and solid waste management. The Applicant’s supply to HMC is a function mentioned under Sl No. 6 of the Twelfth Schedule.
The Bench opined that the applicant’s service to MC, was exempt under Sl No. 3 of the Exemption Notification.
The Bench further noted that the TDS Notifications have given effect to section 51 of the GST Act, specifying the persons under section 51(1Xd) of the Act and have mandated and laid down the mechanism for deduction of TDS. These notifications, therefore, are applicable only if TDS is deductible on the Applicant’s supply under section 51 of the GST Act. Section 51 (1) of the Act provides that the Government may mandate inter alia a local authority to deduct TDS while making payment to a supplier of taxable goods or services or both.
The Bench opined that as the applicant was making an exempt supply to the MC, the provisions of section 51 and, for that matter, the TDS Notifications did not apply to his supply.
The Bench noted that Supply of unbranded organic manure, unless packed in containers, is classifiable under HSN 3101. Municipal waste is classifiable under HSN 3825. Supplies of both of them are exempt under Sl Nos. 108 and 110 of the Exemption Notifications (Goods), respectively. lf the Applicant’s turnover consists entirely of exempt supplies, he is not liable to registration in terms of section 23(1)(a) of the GST Act.
Accordingly, the AAR gave the ruling that the applicant’s supply to the Municipal Corporation was exempt from the payment of GST under Sl No. 3 of Notification No. 12/2017 – Central Tax (Rate) dated 28/06/2017 and corresponding State Notification. As the Applicant was making an exempt supply, the provisions of section 51 and, for that matter, Notification No.50/2018 – Central Tax and corresponding State Notification to the extent they mandate and deal with the mechanism of TDS, did not apply to his supply. lf the Applicant’s turnover consists entirely of exempt supplies, he was not liable to registration in terms of section 23(1)(a) of the GST Act.