No GST payable on reimbursement of road restoration charges paid to Municipal Corporation; it is a sovereign function, not amounting to ‘tolerating an act’ – Gujarat High Court

In brief

In a recent judgement¹, the Gujarat High Court quashed a goods and services tax (GST) demand raised on the petitioner in respect of payments made by it to the Ahmedabad Municipal Corporation (Municipal Corporation) towards road restoration. It was alleged that tax was required to be paid by the petitioner under reverse charge mechanism (RCM). The court held that such payments are in the nature of compensation mandated under the Electricity Act, 2003 (Electricity Act) for damage caused while laying or maintaining electricity distribution lines and do not constitute consideration for a ‘supply’ under section 7 of the Central Goods and Services Tax Act, 2017 (CGST Act).

It was also held that such payments cannot be characterised as consideration for ‘agreeing to tolerate an act’ under para 5(e) of Schedule II to the CGST Act. Restoration and maintenance of public roads is a sovereign or municipal function entrusted under Article 243W of the Constitution of India and accordingly exempt from GST under the GST law. Consequently, the show cause notice and order-in original demanding GST (with interest and penalty) under section 74 of the CGST Act were set aside.