Clarification on Time of Supply in Respect of Construction and Maintenance Services for NHAI Highway Projects under HAM Model
7/8/20245 min read
Understanding the Hybrid Annuity Model (HAM) for Highway Projects
The Hybrid Annuity Model (HAM) represents a significant shift in the approach of the National Highways Authority of India (NHAI) towards highway project development. This model blends the strengths of the Build-Operate-Transfer (BOT) and Engineering, Procurement, and Construction (EPC) models to create a balanced framework aimed at enhancing the efficiency and financial viability of highway projects.
Under HAM, the financial risk is shared between the government and the private sector. The government provides up to 40% of the project cost during the construction phase, reducing the initial financial burden on private developers. The remaining 60% is funded by the private entity, which recoups its investment through semi-annual annuity payments from the government over a fixed period, typically extending to 15-20 years. This structured payment mechanism ensures a steady revenue stream, thereby offering a more balanced risk-reward ratio for private developers compared to the BOT model, where the developer takes on full financial responsibility and recoups investment through toll collection.
One of the key distinctions of HAM from other models is its emphasis on timely project completion and maintenance. Unlike the EPC model, where the contractor is responsible only for the construction, under HAM, the private entity is also tasked with maintaining the highway for a specified period. This ensures sustained project quality and performance over time.
The primary stakeholders in HAM projects include the government, private developers, and financial institutions. The government, through NHAI, plays a crucial role in project planning, land acquisition, and regulatory approvals. Private developers are responsible for the construction, operation, and maintenance of the highway. Financial institutions provide the necessary funding, often through loans and other financial instruments, to support the developer's share of the project cost.
The objectives of the Hybrid Annuity Model are multifaceted. By sharing financial risk and offering assured annuity payments, HAM aims to attract more private sector participation, thereby accelerating the pace of infrastructure development. Additionally, it targets reducing the financial burden on the government and ensuring the timely completion and maintenance of highway projects. This model aligns the interests of all stakeholders, fostering a collaborative environment conducive to the successful execution of highway infrastructure projects.
The legal framework for determining the time of supply for construction services under the Hybrid Annuity Model (HAM) is primarily governed by the Goods and Services Tax (GST) Act. According to the GST Act, the time of supply is a critical factor that determines when the liability to pay tax arises. For construction services, the time of supply is typically linked to the issuance of invoices, receipt of payment, or the completion of specified milestones.
Determining the Time of Supply
The GST Act stipulates that the time of supply for construction services is determined by the earliest of the following events: the issuance of an invoice by the service provider, the receipt of payment by the service provider, or the completion of a milestone as specified in the contract. This approach ensures that the tax liability is recognized at an appropriate point in the project lifecycle, thereby facilitating accurate financial planning and cash flow management.
Recently department issued clarification vide circular 221/15/2024-GST on dated 26th June' 2024
Under the Hybrid Annuity Model (HAM) of concession agreements, the highway development projects are under Design, Build, Operate and Transfer model (DBOT), wherein the concessionaire is required to undertake new construction of Highway, as well as the Operation and Maintenance (O&M) of Highways. The payment terms for the construction portion as well as the O&M portion of the contract are provided in the agreement between National Highways Authority of India (NHAI) and the concessionaire.
2.1 A HAM contract is a single contract for construction as well as operation and maintenance of the highway. The payment terms are so staggered that the concessionaire is held accountable for the repair and maintenance of the highway as well. The contract needs to be looked at holistically based on the services to be performed by the concessionaire and cannot be artificially split into two separate contracts for construction and operation and maintenance, based on the payment terms. The concessionaire is bound contractually to complete not only the construction of the highway but also to operate and maintain the same.
2.2 In HAM contract, the payment is made spread over the contract period in installments and payment for each installment is to be made after specified periods, or on completion of an event, as specified in the contract. The same appears to be covered under the ‘Continuous supply of services’ as defined under section 2(33) of the CGST Act.
2.3 As per clause (a) of Section 13(2) of CGST Act, the time of supply in respect of a supply of services shall be the date of issue of Invoice, or date of receipt of payment, whichever is earlier, in cases where invoice is issued within the period prescribed under section 31 of CGST Act. Further, as per clause (b) of Section 13(2) of CGST Act, in cases where invoice is not issued within the period prescribed under section 31, the time of supply of service shall be date of provision of the service or date of receipt of payment, whichever is earlier. However, as per section 31(5) of CGST Act, in cases of continuous supply of services, where the payment is made periodically, either due on a specified date or is linked to the completion of an event, the invoice is required to be issued on or before the specified date or the date of completion of that event.
2.4 Accordingly, as per section 13(2) of CGST Act, read with section 31(5) of CGST Act, time of supply of services under HAM contract, including construction and O&M portion, should be the date of issuance of such invoice, or date of receipt of payment, whichever is earlier, if the invoice is issued on or before the specified date or the date of completion of the event specified in the contract, as applicable. However, in cases, where the invoice is not issued on or before the specified date or the date of completion of the event specified in the contract, as per clause (b) of section 13(2), time of supply should be the date of provision of the service, or date of receipt of payment, whichever is earlier. In case of continuous supply of services, the date of provision of service may be deemed as the due date of payment as per the contract, as the invoice is required to be issued on or before the due date of payment as per the provisions of Section 31(5) of CGST Act
3. In the light of above, it is clarified that the tax liability on the concessionaire under the HAM contract, including on the construction portion, would arise at the time of issuance of invoice, or receipt of payments, whichever is earlier, if the invoice is issued on or before the specified date or the date of completion of the event specified in the contract, as applicable. If invoices are not issued on or before the specified date or the date of completion of the event specified in the contract, tax liability would arise on the date of provision of the said service (i.e., the due date of payment as per the contract), or the date of receipt of the payment, whichever is earlier.
4. It is also clarified that as the installments/annuity payable by NHAI to the concessionaire also includes some interest component, the amount of such interest shall also be includible in the taxable value for the purpose of payment of tax on the said annuity/installment in view of the provisions of section 15(2)(d) of the CGST Act.
Understanding the Hybrid Annuity Model (HAM) for Highway Projects
The Hybrid Annuity Model (HAM) represents a significant shift in the approach of the National Highways Authority of India (NHAI) towards highway project development. This model blends the strengths of the Build-Operate-Transfer (BOT) and Engineering, Procurement, and Construction (EPC) models to create a balanced framework aimed at enhancing the efficiency and financial viability of highway projects.
Under HAM, the financial risk is shared between the government and the private sector. The government provides up to 40% of the project cost during the construction phase, reducing the initial financial burden on private developers. The remaining 60% is funded by the private entity, which recoups its investment through semi-annual annuity payments from the government over a fixed period, typically extending to 15-20 years. This structured payment mechanism ensures a steady revenue stream, thereby offering a more balanced risk-reward ratio for private developers compared to the BOT model, where the developer takes on full financial responsibility and recoups investment through toll collection.
One of the key distinctions of HAM from other models is its emphasis on timely project completion and maintenance. Unlike the EPC model, where the contractor is responsible only for the construction, under HAM, the private entity is also tasked with maintaining the highway for a specified period. This ensures sustained project quality and performance over time.
The primary stakeholders in HAM projects include the government, private developers, and financial institutions. The government, through NHAI, plays a crucial role in project planning, land acquisition, and regulatory approvals. Private developers are responsible for the construction, operation, and maintenance of the highway. Financial institutions provide the necessary funding, often through loans and other financial instruments, to support the developer's share of the project cost.
The objectives of the Hybrid Annuity Model are multifaceted. By sharing financial risk and offering assured annuity payments, HAM aims to attract more private sector participation, thereby accelerating the pace of infrastructure development. Additionally, it targets reducing the financial burden on the government and ensuring the timely completion and maintenance of highway projects. This model aligns the interests of all stakeholders, fostering a collaborative environment conducive to the successful execution of highway infrastructure projects.
The legal framework for determining the time of supply for construction services under the Hybrid Annuity Model (HAM) is primarily governed by the Goods and Services Tax (GST) Act. According to the GST Act, the time of supply is a critical factor that determines when the liability to pay tax arises. For construction services, the time of supply is typically linked to the issuance of invoices, receipt of payment, or the completion of specified milestones.
Determining the Time of Supply
The GST Act stipulates that the time of supply for construction services is determined by the earliest of the following events: the issuance of an invoice by the service provider, the receipt of payment by the service provider, or the completion of a milestone as specified in the contract. This approach ensures that the tax liability is recognized at an appropriate point in the project lifecycle, thereby facilitating accurate financial planning and cash flow management.
Recently department issued clarification vide circular 221/15/2024-GST on dated 26th June' 2024
Under the Hybrid Annuity Model (HAM) of concession agreements, the highway development projects are under Design, Build, Operate and Transfer model (DBOT), wherein the concessionaire is required to undertake new construction of Highway, as well as the Operation and Maintenance (O&M) of Highways. The payment terms for the construction portion as well as the O&M portion of the contract are provided in the agreement between National Highways Authority of India (NHAI) and the concessionaire.
2.1 A HAM contract is a single contract for construction as well as operation and maintenance of the highway. The payment terms are so staggered that the concessionaire is held accountable for the repair and maintenance of the highway as well. The contract needs to be looked at holistically based on the services to be performed by the concessionaire and cannot be artificially split into two separate contracts for construction and operation and maintenance, based on the payment terms. The concessionaire is bound contractually to complete not only the construction of the highway but also to operate and maintain the same.
2.2 In HAM contract, the payment is made spread over the contract period in installments and payment for each installment is to be made after specified periods, or on completion of an event, as specified in the contract. The same appears to be covered under the ‘Continuous supply of services’ as defined under section 2(33) of the CGST Act.
2.3 As per clause (a) of Section 13(2) of CGST Act, the time of supply in respect of a supply of services shall be the date of issue of Invoice, or date of receipt of payment, whichever is earlier, in cases where invoice is issued within the period prescribed under section 31 of CGST Act. Further, as per clause (b) of Section 13(2) of CGST Act, in cases where invoice is not issued within the period prescribed under section 31, the time of supply of service shall be date of provision of the service or date of receipt of payment, whichever is earlier. However, as per section 31(5) of CGST Act, in cases of continuous supply of services, where the payment is made periodically, either due on a specified date or is linked to the completion of an event, the invoice is required to be issued on or before the specified date or the date of completion of that event.
2.4 Accordingly, as per section 13(2) of CGST Act, read with section 31(5) of CGST Act, time of supply of services under HAM contract, including construction and O&M portion, should be the date of issuance of such invoice, or date of receipt of payment, whichever is earlier, if the invoice is issued on or before the specified date or the date of completion of the event specified in the contract, as applicable. However, in cases, where the invoice is not issued on or before the specified date or the date of completion of the event specified in the contract, as per clause (b) of section 13(2), time of supply should be the date of provision of the service, or date of receipt of payment, whichever is earlier. In case of continuous supply of services, the date of provision of service may be deemed as the due date of payment as per the contract, as the invoice is required to be issued on or before the due date of payment as per the provisions of Section 31(5) of CGST Act
3. In the light of above, it is clarified that the tax liability on the concessionaire under the HAM contract, including on the construction portion, would arise at the time of issuance of invoice, or receipt of payments, whichever is earlier, if the invoice is issued on or before the specified date or the date of completion of the event specified in the contract, as applicable. If invoices are not issued on or before the specified date or the date of completion of the event specified in the contract, tax liability would arise on the date of provision of the said service (i.e., the due date of payment as per the contract), or the date of receipt of the payment, whichever is earlier.
4. It is also clarified that as the installments/annuity payable by NHAI to the concessionaire also includes some interest component, the amount of such interest shall also be includible in the taxable value for the purpose of payment of tax on the said annuity/installment in view of the provisions of section 15(2)(d) of the CGST Act.