GST Input Tax Credit Rules for Road Construction Projects
The Appellate Authority for Advance Ruling decided that annuity payments for road construction are exempt, limiting Input Tax Credit to 50% during construction.
- Ruling
- ORDER NO.RAJ/AAAR/06/2018-19 DATED 12.2.2019
- Authority
- Appellate Authority for Advance Ruling
This page was written by Patron Accounting’s AI from the official release and reviewed before publishing. It explains the document in plain language. It is not the document itself. Where this page and the original differ, the original governs.
The short version
- Annuity payments for road projects are exempt from GST.
- Exempt income restricts the ability to claim full Input Tax Credit.
- Construction phase Input Tax Credit is limited to 50%.
- Full Input Tax Credit is allowed during the O&M phase if no exempt supplies exist.
In short
The company asked the Appellate Authority for Advance Ruling (AAAR) whether they could claim full Input Tax Credit (ITC) on goods and services used to build a highway. Because the government pays them in exempt annuity payments, the authority had to decide how much tax credit the company could keep.
What has changed
How it worked before
Many road construction companies assumed they could claim full Input Tax Credit on all project expenses, regardless of whether their income from the government was taxable or exempt.
What has changed
The authority ruled that because annuity payments are exempt from GST, the company cannot claim full tax credits. For the construction phase, the company is restricted to claiming only 50% of the tax paid on inputs. This means businesses must now calculate their tax credits proportionally based on their exempt and taxable income.
Who this affects
This ruling affects road construction companies and concessionaires working on DBOT (Design, Build, Operate, Transfer) highway projects.
An example
Imagine a construction firm building a state highway under a similar DBOT contract. They want to claim 100% of the GST paid on cement and steel. Based on this ruling, they should expect their tax officer to limit that claim to 50% because their annuity income is exempt from GST.
What you should do
This ruling is only binding for the company that asked the question and its specific tax office. If you are in a similar position, do not automatically apply this 50% rule to your own filings; consult with your tax advisor to see how your specific contract and income streams affect your eligibility for tax credits.
If you do nothing
If you assume this ruling applies to you and claim full tax credits without legal backing, you risk a tax audit and potential penalties. A tax officer may demand the repayment of the excess credit plus interest. Relying on another company's ruling as if it were a general law is a common mistake that can lead to significant financial liability.
The terms explained
- Input Tax Credit
- The tax a business pays on its own purchases that it can use to reduce the tax it owes on its sales.
- Annuity Payment
- A fixed sum of money paid to the company by the government at regular intervals for the construction and maintenance of the road.
- DBOT
- A project model where a company designs, builds, operates, and eventually transfers a public asset like a highway back to the government.
The ruling in detail
Appellate Authority for Advance Ruling
M/s Nagaur Mukundgarh Highways Pvt. Ltd.
ORDER NO.RAJ/AAAR/06/2018-19 DATED 12.2.2019 · Rajasthan
Questions before the authority
- claim full ITC pertaining to procurement of goods and services for construction of the project during the Construction Period, as the entire revenue received during the said period is subject to GST; and
- claim ITC pertaining to procurement of goods and services during the O & M period after reversal of ITC as per Section 17(2) of the Central Goods and Services Tax Act, 2017 read with Rule 42 of the Central Goods and Services Tax Rule, 2017 as Annuity Payment received during the said period is exempt whereas O & M payments are subject to GST.
Facts
The Appellant is a Special Purpose Vehicle engaged as a Concessionaire by the Public Works Department of Rajasthan to construct, operate, and maintain a state highway project on a DBOT basis. The project involves a construction period followed by an O&M period, with the Appellant receiving project cost payments in installments and annuity payments. The dispute concerns the eligibility of Input Tax Credit (ITC) during the construction and O&M phases given the taxability of these receipts.
Ruling
| Question | What the authority ruled |
|---|---|
| ITC during construction phase | Only 50% of the ITC is available Subject to provisions of Section 17(5) of the CGST Act, 2017 |
| ITC during O&M phase | Full ITC is available Subject to provisions of Section 17(5) of the CGST Act, 2017 |
The authority ruled that annuity payments are exempt under the specified notification, but this exemption restricts the availability of ITC. Consequently, the Appellant is entitled to only 50% of the ITC on inputs and input services used during the construction phase. For the O&M phase, the Appellant is entitled to full ITC on inputs and input services, provided they have no other outward exempt supply during that phase.
Reasoning
The authority determined that annuity payments for road construction are exempt under Entry No. 23A of Notification No. 12/2017-Central Tax (Rate). Because these payments are exempt, the Appellant cannot claim full ITC for the construction phase, leading to a proportionate restriction under Section 17(2) of the CGST Act and Rule 42 of the CGST Rules. However, for the O&M phase, the authority found that if the Appellant has no other exempt outward supplies, they are entitled to full ITC on inputs and input services. The decision relies on the interpretation of the GST Council's intent to treat annuity payments as exempt to avoid taxing the value addition of the concessionaire.
Provisions relied on
- Section 17(2) of the CGST Act, 2017
- Section 17(5) of the CGST Act, 2017
- Rule 42 of the CGST Rules, 2017
- Entry No. 23A of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017
- Notification No. 32/2017-Central Tax (Rate) dated 13.10.2017
For the practitioner
This ruling clarifies that **annuity payments for road construction are exempt** from GST, which triggers a restriction on ITC for the construction phase. Practitioners should note that the authority limits ITC to 50% for the construction period due to this exemption. It provides a clear framework for concessionaires to calculate ITC eligibility across different project phases.
Source
This is a summary prepared from the published order, which is a scanned document. It is a reading aid and not the authority: where the two differ, the order governs. Verify every provision against the original before relying on it.
Original order: https://www.gstcouncil.gov.in/sites/default/files/2024-02/aaar-raj-6-2018_dtd._12.02.19-nmhpl.pdf
Legibility of the scan, as read: high.
Prepared 13-10-2026.
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