WIRC Bulletin-April 2018

HYBRID ANNUITY MODEL (HAM): Basic Understanding by CMA Subhasish Paul

 

Concept and necessity of HAM:

HAM is a game changer in the construction arena, particularly in Road, in PPP model.  As the name suggest, it is a hybrid of both of EPC (Engineering, procumbent and Construction) model and BOT (Built, Operate and Transfer) model.

Under EPC Model, NHAI provide contracts for construction of roads to private player. Private players construct the road with in a stipulated time period and hand over it to the NHAI. Ownership lies with the  NHAI. Responsibility of Toll collection and maintenance of road remains with the NHAI. In this model entire investments to be done by NHAI during construction period in the form of payment to the invoices raised by the EPC contractor.

Under BOT model, private players takes the responsibility of construction, maintenance and toll collection for a specified period of time say 20 years (Construction period included) . During this 20 years, all toll collection will be done by Contractor and maintenance to be done by himself. After the expiry of 20 years, Ownership of the road is handed over the NHAI. In this model private player to invest all monies during construction period and expected to recover these amount ( along with the interest cost ) form the toll revenue.  Private payer is always running a risk after huge initial cash out flow.

To overcome this risk and uncertainty, a alternate version of BOT model is BOT Annuity model. In this annuity model, generally, toll revenue risk is taken by NHAI while the contractor is paid a pre-fixed annuity for construction and maintenance of road.

HAM is the hybrid model of EPC and BOT. In this model, private player to construct the roads in which 40% of the project costs will be paid by NHAI during construction period and remaining 60% of the cost will be paid in annuity during the maintenance period along with the agreed interest. Separate agreement and payment to be made to maintenance of road in each year. This model is the combination of both EPC and BOT annuity. 40% of the total initial costs (BID price) are released during construction period like EPC and Rest payment is equivalent to BOT annuity.

Now question arises why this model is important. Concept of HAM model comes into picture for better financial mechanism for road development. In EPC model, entire project costs to be borne by NHAI and in BOT model private players  had to fully arrange for its finances. Developers had to take on the entire risk of low passenger traffic.  Assumptions on traffic had gone awry affecting returns in the various past instances. Now, they are unwilling to commit large sums of money in such models. Banks are also unwilling to provide large sum of loan in this model.

HAM is the middle approach to trade off risks between developer and NHAI. Only investing 40% Government can flag off the road projects. Annuity payments ensures the developer and steady cash flow during maintenance period.

Risk allocation in different contract models are depicted in the following table

 

Type of Model Financing Risk Revenue Risk O & M Risk
EPC NHAI NHAI NHAI
BOT Private player Private player Private player
BOT(Annuity) Private player Government Private player
HAM NHAI & Private NHAI NHAI or Private( depending upon contract)

Taxation Aspects

This model is being considered for construction of roads for our discussion. Road being an immovable property comes under the definition of ‘Works Contract’ as per definition of Section 2(119) of CGST Act,2017.

As per Schedule II , Point no 6(a) , Works contract will be considered as ‘supply of services’. So taxation aspects of HAM projects will be judged in the light of GST applicability for supply of services giving due considerations to the relevant notifications and rules.

So, we need to understand first what is ‘supply’ and what is the ‘point of taxation’ for the supply of services.

The taxable event in GST is the ‘supply’ of goods or services or both. The term supply has been ‘inclusively’ defined in the GST Act. Following parameters are applicable to determined the ‘supply’ in GST.

  1. Supply should be of goods or services or both. So supply anything other than goods or services will not attract GST. ( Schedule III attached to CGST Act prescribe certain activities which will be neither supply of goods nor supply of services)
  2. Supply should be made for a consideration. ( Schedule I attached to CGST Act prescribes certain activities which will be considered as supply even if made without consideration)
  3. Supply should be a taxable supply.
  4. Supply should be made by a taxable person.
  5. Supply should be made in the course or furtherance of business.

Point of Taxation: Point of Taxation means the date on which tax liability arises i.e. the date on which event for charging GST arises. It is called the ‘Time of supply’ in GST. Section 13 of CGST Act deals with the ‘Time of supply of services’

Time of supply of services as per section 13(2) of the CGST Act,2017 is the earliest of the following

  1. Date of issue of invoices as per section 31(2) of CGST Act,2017 read with Rule 47 of CGST Rule 2017 ( Which is 30 days from the date of supply of services) or the date of receipt of payment which ever is earlier. OR
  2. Date of provisions of services if the invoice is not issued within the specified time as above or the date of receipts of payment whichever is earlier. Or
  3. Where the provision of (a) or (b) is not applicable, the date on which the recipient shows the receipts of services in his books of accounts.

In the HAM model it has been discussed in the earlier paragraphs only 40% payments will be done by the customer during the construction period. Remaining 60% will be paid as annuity during the maintenance period. Separate contract will be there for maintenance of road between customer and contractor in which customer will pay an annual sum for such repairs and maintenance.

Now implication of the GST has to be analyzed in the light of following activities.

  1. 40% payment receipts during 100% construction period on raising of invoices.
  2. 100% expenses incurred during construction of roads.
  3. 60% payment receipts in annuity over the maintenance period ( Post construction period)
  4. Each year’s maintenance expenses incurred for repair and maintenance of road.
  5. Each year’s revenue received for repair and maintenance of road.

GST rates on Construction of Road

As per Notification 20/2017-Central Tax (Rate) dated 22nd August,2017, GST rate for ‘ composite supply of works contract as defined in section 2(119) of CGST Act , 2017, supplied by way of construction , erection, commissioning, installations, completion, fitting out, repairs maintenance, renovation, or alteration of – a road, bridge, tunnel, terminal for road transportation for use by general public.’ is 12% ( 6 % + 6% or 12%).

Areas of concern:

In the HAM model following gray areas are to be address properly in terms of legal aspects as well as Accounting aspects.

  1. During construction period, ICT has been accumulated for 100% expenses but Output liability is to be discharged only on 40%. What will be the treatment of accumulated unadjusted ITC.
  2. No GST is applicable on Annuity payment. It means when payment of remaining 60% will be received post construction period, there will be no ‘Output Liability’. Then how to adjust the unutilized ITC.
  3. Not certainly clear whether entire value will be considered as ‘Financial Assets’ as defined in IND AS 32 or only 60% value will be considered as ‘Financial Assets.

Conclusion: It’s new and upgraded version no doubt. As far as financial involvement is concern, this model may help both the contractor and customer but lots of clarity is required for treatment of ‘unutilized ITC’ and accounting treatment of entire scheme which largely will depends upon the explicit clarification on ‘Financial Instruments’ for this model.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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