Revenue sharing agreement, Goods and Services Tax - GST

[Dinesh Mehta]

ABC enters into agreement for 25 years with XYZ (A charitable trust) for development, operation & management of Hospital on revenue sharing basis. XYZ owns land and has already constructed 30% of the hospital. ABC will develop, operate & manage the hospital by deploying its resources & man power and collect all revenue and share it as per agreed terms after its commissioning. All income derived from Hospital, being medical services will be exempt from GST. ABC will give ₹ 15 crore as deposit which is refundable after 25 years.

Will service of construction of balance 70% of hospital by ABC be liable to GST assuming the same as deemed joint venture? If yes, at what rate GST is applicable?

Is sharing of revenue of Hospital Income by ABC to XYZ liable to GST?

Deposit being refundable, will there be any GST implication on the same?

Posts / Replies

[KASTURI SETHI]

(1) Whether construction of hospital is commercial activity or not is a debatable issue. In my view, it is taxable. Regarding valuation, you will have to resort to Valuation Rules.

(2) Sharing of revenue agreement is actionable claim. Covered under Schedule-III. Not liable to GST. There are divergent views on this issue. There are many decisions of AAR. Some decisions are pro-revenue and some are in favour of assessees. One decision in your favour is as under :-

(i) 2019 (27) GSTL.32 (AAR-GST) AAR = 2019 (7) TMI 1000 - AUTHORITY FOR ADVANCE RULING, TAMILNADU Tamilnadu Applicant : Venkatasamy Jagannathan

(3) Deposit refundable is not advance. Hence not liable to GST. However, deposit can be given the character of advance. Deposit is subject to 'buts' and 'ifs'. You will have to be very very careful while drafting the agreement. Terms and conditions will determine whether such deposit is advance or not. Decision of AAR 2020 (9) TMI-737-AAR Karnataka TMI Issue ID 398617 = 2020 (9) TMI 736 - AUTHORITY FOR ADVANCE RULING, KARNATAKA

You need the services of an expert advocate on all the three issues.

[Himansu Sekhar]

Circular No. 151/2/2012-S.T., dated 10-2-2012

F.No. 332/13/2011-TRU

2.6 Build-Operate-Transfer (BOT) Projects : Many variants of this model are being followed in different regions of the country, depending on the nature of the project. Build-Own-Operate-Transfer (BOOT) is a popular variant. Generally under BOT model, Government or its agency, concessionaire (who may be a developer/builder himself or may be independent) and the users are the parties. Risk taking and sharing ability of the parties concerned is the essence of a BOT project. Government or its agency by an agreement transfers the ‘right to use’ and/or ‘right to develop’ for a period specified, usually thirty years or near about, to the concessionaire.

Clarification : Transactions involving taxable service take place usually at three different levels: firstly, between Government or its agency and the concessionaire; secondly, between concessionaire and the contractor and thirdly, between concessionaire and users, all in terms of specific agreements.

At the first level, Government or its agency transfers the right to use and/or develop the land, to the concessionaire, for a specific period, for construction of a building for furtherance of business or commerce (partly or wholly). Consideration for this taxable service may be in the nature of upfront lease amount or annual charges paid by the concessionaire to the Government or its agency. Here the Government or its agency is providing ‘renting of immovable property service’ (renting of vacant land to be used for furtherance of business or commerce) and in such cases the concessionaire becomes the service receiver.

In this model, though the concessionaire is undertaking construction of a building to be used wholly or partly for furtherance of business or commerce, on the land provided by the government or its agency for temporary use, he will not be treated as a service provider since such construction has been undertaken by him on his own account and he remains the owner of the building during the concession period.

This may be useful

[Dinesh Mehta]

Thanks Sethi sir for the prompt reply.

In this case can it be considered as unincorporated Joint Venture(JV) and supply of construction services by member to unincorporated JV in view of Circular No. 35/9/2018-GST dated 5th March 2018?

[ABHISHEK TRIPATHI]

KS Sir has rightly explained all the points.

Circular No. 35/9/2018-GST this for taxability of cash call. I don't understand why are you citing this? I think it's 995415 - which falls under the residuary entry of 9954 of the Rate Notification.