GST on Municipal Operation and Maintenance Contracts: Maharashtra AAR Ruling
Operation and maintenance contracts for municipal bodies attract GST unless goods provided stay under 25% of total value.
- Ruling
- NO.GST-ARA- 04/2017-18/B-28, Mumbai, dt. 05.05.2018
- Dated
- 05 May 2018
- Authority
- 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
- Municipal O&M contracts involving spares or consumables are not exempt pure services.
- GST applies at 18% or 12% depending on the date of service.
- Exemption applies after 25 January 2018 only if goods stay below 25%.
- Contractors must pay GST even if the municipal authority refuses reimbursement.
- Contractors can claim input tax credit on purchases made for these contracts.
In short
A civil contractor managed sewage treatment plants for municipal corporations, where labour made up 95% to 98% of the contract value. The municipal bodies refused to reimburse GST, claiming these services were exempt public functions. The contractor asked the tax authority whether this work qualified as exempt pure services and who was legally responsible for paying the tax.
What has changed
How it worked before
Contractors working with municipal corporations often assumed their operation and maintenance services were completely exempt from GST as pure public welfare services, especially when labour formed almost the entire contract value.
What has changed
The Maharashtra Authority for Advance Ruling decided that supplying spare parts, chemicals, or consumables makes the contract a composite supply rather than a pure service. This meant GST applied at 18% initially, then 12%. From 25 January 2018 onward, exemption applies only if goods make up 25% or less of the total contract value. Crucially, the contractor must pay this tax even if the municipal body refuses to reimburse them.
Who this affects
Civil contractors and engineering firms running operation and maintenance contracts for municipal corporations, local bodies, or government agencies.
An example
ABC Eco Solutions runs a water treatment plant for a local municipality under a contract worth 10 lakh rupees. Labour makes up 9.5 lakh rupees, while replacement filters and chemicals account for 50,000 rupees (5%). Because the goods portion is only 5%, well below the 25% cap, the contract qualifies for GST exemption under post-January 2018 rules. If filter costs rose to 3 lakh rupees (30%), the entire contract would attract GST, and ABC Eco Solutions would have to deposit the tax even if the municipality refused to reimburse it.
What you should do
Check your municipal contracts to calculate what percentage of the total contract value goes towards goods, spare parts, and consumables. If goods exceed 25%, ensure GST is factored into your billing and bids. Remember that an advance ruling binds only the specific business that applied, so consult a tax professional before changing how you pay your taxes.
If you do nothing
If you assume your municipal maintenance contract is automatically exempt without verifying the goods percentage, tax officers may demand back-dated GST along with interest and heavy penalties. You cannot defend yourself by claiming the municipal body refused to pay the GST amount. The legal obligation to deposit tax rests entirely with you as the supplier.
The terms explained
- input tax credit
- The GST you pay on business purchases that you can deduct from the GST you collect on your sales.
- composite supply
- A contract that combines both goods and services delivered together as a single package.
- pure services
- Contracts that involve only labour or service work without supplying any physical goods, equipment, or materials.
The ruling in detail
Authority for Advance Ruling
KHILARI INFRASTRUCTURE PRIVATE LIMITED
NO.GST-ARA- 04/2017-18/B-28, Mumbai, dt. 05.05.2018 · Maharashtra
Questions before the authority
- Determination of GST leviable on operation and maintenance work order given by municipal corporations.
- Admissibility of ITC (input Credit tax) of purchases against such work order.
- Determination of responsibility of municipal authority of discharging such GST Liability payable to contractor.
- Applicability of GST on Service Contract where labour job Contribute 95% to 98% of Contract Value and 2-3% as Oil and Lubricant and pertains to consumable Purchase to operate the Existing Plant.
Facts
The applicant is a registered civil contractor engaged in the operation and maintenance (O&M) of sewage treatment plants (STP) and solid waste processing plants for various municipal corporations and local authorities. Although labour accounts for 95% to 98% of the contract value, the contracts require the applicant to supply spares, consumables, replacement parts, and chemicals. Municipal bodies refused to reimburse GST, claiming the O&M activities were exempt municipal functions under Article 243W of the Constitution of India.
Ruling
| Question | What the authority ruled |
|---|---|
| GST rate on O&M work orders for municipal bodies | CGST & SGST @ 9% each (01.07.2017 to 21.08.2017), CGST & SGST @ 6% each (22.08.2017 to 24.01.2018), exempt post 25.01.2018 Exemption post 25.01.2018 is subject to goods value not exceeding 25% of total contract value |
| Admissibility of Input Tax Credit (ITC) | Eligible Subject to terms and conditions under Sections 16 to 22 of CGST Act and Rules 36 to 45 |
| Responsibility to discharge GST liability | Liability is on the supplier Legal statutory liability rests with supplier regardless of contractual recovery terms with recipient |
| GST applicability on contracts with 95%-98% labour component | CGST & SGST @ 9% each (01.07.2017 to 21.08.2017), CGST & SGST @ 6% each (22.08.2017 to 24.01.2018), exempt post 25.01.2018 Exemption post 25.01.2018 is subject to goods value not exceeding 25% of total contract value |
The authority held that the O&M contracts involve supply of goods alongside services, constituting a composite supply rather than pure services. The contracts attracted **18% GST** from 01.07.2017 to 21.08.2017 and **12% GST** from 22.08.2017 to 24.01.2018. Exemption applies post-25.01.2018 only if the value of goods supplied does not exceed 25% of the total composite supply value.
Reasoning
Contract terms demonstrated that the applicant is responsible for replacing damaged parts, installing equipment, and providing consumables and spares, ruling out classification as **pure services** under Serial No. 3 of Notification No. 12/2017-Central Tax (Rate). Prior to 25.01.2018, composite supplies of works contract to municipal entities were taxable under Notification No. 11/2017-Central Tax (Rate) as amended by Notification No. 20/2017-Central Tax (Rate). With effect from 25.01.2018, Notification No. 02/2018-Central Tax (Rate) inserted Entry 3A exempting composite supplies to local authorities provided the goods component does not exceed 25%. Under Section 9 of the CGST Act, statutory liability to pay tax is on the supplier, irrespective of whether the recipient municipal body reimburses it. Input tax credit is available to the supplier under Section 16 subject to statutory conditions.
Provisions relied on
- Section 9 of the CGST Act, 2017
- Section 16 to 22 of the CGST Act, 2017
- Rules 36 to 45 of the CGST Rules, 2017
- Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017
- Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 (Sr. No. 3)
- Notification No. 20/2017-Central Tax (Rate) dated 22.08.2017
- Notification No. 02/2018-Central Tax (Rate) dated 25.01.2018 (Sr. No. 3A)
- Article 243W of the Constitution of India
For the practitioner
This ruling establishes that municipal O&M contracts involving repair, spare parts, or consumables cannot be claimed as pure services. Practitioners handling contractors for municipal bodies can rely on this order to verify eligibility for exemption under **Entry 3A of Notification No. 12/2017-CT(R)** by ensuring the goods component is capped at 25%. It also clarifies that local body refusal to pay GST does not absolve the contractor of its statutory liability to deposit tax.
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/AAR/mah_aar_04_2017-18_b-28_khilari_infrastructure_pvt_ltd.pdf
Legibility of the scan, as read: high.
Prepared 17-10-2026.
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