You may be paying higher tax on annual maintenance bills
April, 29th 2019
Conflicting rulings from tax authorities of advance rulings in different states on applicable goods and services tax rate on annual maintenance contracts have caused considerable confusion in the industry.
The various Authorities of Advance Rulings (AARs) have pegged GST on annual maintenance contracts (AMCs) that companies offer to customers of various products and equipment at 12%, or 18%, or even 28%, industry experts said.
Latest one on Thursday from appellate authority for Advance Rulings in Rajasthan has further added to confusion. It upheld AAR’s decision that taxability of services provided on customer's equipment under comprehensive maintenance services agreement and equipment parts supply and services agreement which includes supply and replacement of spare parts to be taxed at chargeable applicable rates of 12%, 18%, 28% which ever is higher.
AMCs are common practice for maintenance of all household consumer durables and in some cases even automobiles. Also, companies across different industries take up AMCs for maintenance of their large machinery.
The situation is particularly worrying companies that rely on AMCs for maintenance of their equipment, experts said.
They fear that tax authorities may question industry on treatment of these contracts. Also, AMC service providers are unsure as to what is the rate of tax they should collect from consumers.
Authority for Advance Rulings helps taxpayers ascertain their tax liability in advance. But AARs of different states have given divergent rulings on applicable GST on AMCs with some considering them as ‘composite supply’ and some as ‘works contract’.
This has prompted experts to seek clarity from the central government.
“With conflicting AARs on taxability of AMC contracts, the need of the hour is for the government to come out with a circular covering all varieties of maintenance contracts and providing guidelines on taxability in each case,” said Harpreet Singh, partner at KPMG.
Experts said the pre-dominant intention of AMCs is service, though goods form a major part of the contract value.
“From a consumer standpoint, the intention behind entering into a maintenance contract is to avail uninterrupted services of any product,” Singh said. “Accordingly, in my view the correct treatment of an AMC contract is to treat the same as service and tax accordingly.”
In a ruling, Uttar Pradesh AAR had termed AMC as a ‘composite contract’ that includes supply of services and goods both, and held it will face 18% GST. Principal supply of service and goods is merely incidental to the maintenance contract, it had said.
Maharashtra AAR on a plea relating to taxability of an AMC ruled that keeping customer's engines in good working condition was a 'composite supply' with provision of services being principal supply. It held that since the contract involved supply of two or more goods or services together in the normal course of business, it would constitute ‘composite supply', implying a rate of 18%.