Municipal Operation & Maintenance Services Allowed Only if Pure Services or Goods Value More than 25% of Total Contract Value: AAR [Read Order]
O&M contracts involving goods are composite supplies eligible for exemption only if the value does not exceed 25% of contract value.
In a recent ruling, the West Bengal Authority for Advance Ruling (AAR) clarified that operation and maintenance services provided to municipal bodies can qualify for Goods and Services Tax (GST) exemption only when they constitute pure services or when the value of goods involved in the composite supply does not exceed 25% of the total contract value.
Applicant Shubhabrata Chowdhury sought clarity on the tax treatment of various municipal operation and maintenance contracts relating to solid waste management, sanitation, drainage and public health services under the Goods and Services Tax (GST) regime.
The applicant argued that municipal operation and maintenance services, such as solid waste management, sewerage and drainage, and public health, are essential civic functions carried out for public welfare and not for commercial purposes. It was said that these services are rendered directly to municipalities in discharge of their constitutional and statutory obligations under Article 243W, and are mandated by laws such as the SWM Rules, 2016, and CPHEEO guidelines.
The applicant also added that the service should be treated as pure services or an eligible composite supply and therefore qualify for GST exemption under entry 3 or 3A, as they are integral to public health, sanitation, etc.
On the other hand, revenue argued that the exemption under Notification No. 12/2017 is available only when all three conditions of Entry 3 are satisfied—namely that the service must be pure, provided to a government or local authority, and connected with functions under Articles 243G/243W.
While the services were provided to municipalities, it was contended that the operation and maintenance of municipal vehicles under solid waste management projects constitute composite supplies involving goods and are therefore not pure services. As a result, the services do not qualify for exemption and are taxable under GST.
After hearing both sides, the authority observed that although the services were provided to municipal bodies, which qualify as local authorities under the Central Goods and Services Tax (CGST), and were connected with constitutional municipal functions under Articles 243G and 243W of the Constitution, exemption under GST cannot be granted automatically on that basis alone
The Authority further observed that the applicant had failed to produce adequate material to establish that no goods were involved in such contracts or that the value of goods remained within permissible limits.
The bench of Shafeeq S and Jaydip Kumar Chakrabarti held that Pure manpower-based municipal services are GST-exempt, composite supplies are exempt only if the goods value is within 25%, and where the goods component exceeds 25%, the services are fully taxable at 9% CGSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
