GST Implications on Services Provided to Panchayats and Municipalities

 GST Implications on Services Provided to Panchayats and Municipalities

Constitutional Framework, Legal Position & Exemption Analysis.

 

1.     Constitutional Framework of Local Self-Government.

The Constitution of India envisages a robust system of local self-government through Panchayats and Municipalities, introduced by the 73rd and 74th Constitutional Amendments.

 

• Articles 243A to 243O deal with Panchayats (rural local bodies)
• Articles 243P to 243ZG deal with Municipalities (urban local bodies)

 

These provisions empower local bodies to function as institutions of self-government, entrusted with constitutionally defined responsibilities.

 

2.     Panchayats - Powers and Functions under Article 243G.

Article 243G of the Constitution of India authorises State Legislatures to endow Panchayats with powers and responsibilities necessary to enable them to function as institutions of self-government, particularly with respect to:

(a) Preparation of plans for economic development and social justice

(b) Implementation of schemes for economic development and social justice, including matters listed in the Eleventh Schedule

 

Eleventh Schedule – Functions Entrusted to Panchayats.

The Eleventh Schedule lists 29 functions, including agriculture, rural housing, drinking water, roads, sanitation, education, health, welfare schemes, public distribution system, and maintenance of community assets, among others. These functions form the constitutional basis for determining whether a service provided to a Panchayat is connected with its statutory role.

 

3.     Municipalities – Powers and Functions under Article 243W.

Article 243W empowers Municipalities to function as institutions of self-government with respect to:

(a) Preparation of plans for economic development and social justice

(b) Performance of functions and implementation of schemes entrusted to them, including matters listed in the Twelfth Schedule

 

Twelfth Schedule – Functions Entrusted to Municipalities.

The Twelfth Schedule enumerates 18 urban functions, such as urban planning, water supply, sanitation, solid waste management, fire services, slum improvement, urban poverty alleviation, public amenities, street lighting, burial grounds, and regulation of slaughter houses.

 

4.     Whether Gram Panchayat Qualifies as a “Local Authority” under GST.

Constitutional Definition.

As per Article 243(d) of the Constitution of India: “Panchayat” means an institution (by whatever name called) of self-government constituted under Article 243B, for the rural areas.

 

A Gram Panchayat, being constituted under Article 243B for rural areas, squarely falls within this definition.

 

GST Law Recognition.

Further, Section 2(69)(a) of the CGST Act, 2017 defines “Local Authority” to include: “a Panchayat as defined in clause (d) of Article 243 of the Constitution.”

 

Conclusion.

Since:

• Gram Panchayat = Panchayat under Article 243(d), and
• Panchayat = Local Authority under Section 2(69) of the CGST Act,

 

Hence A Gram Panchayat is a “Local Authority” for GST purposes.

 

5.     GST Exemption for Services Provided to Panchayats and Municipalities.

Relevant Notification.

Notification No. 12/2017–Central Tax (Rate) dated 28.06.2017, at Serial No. 3 and 3A, provides exemption to:

Pure services (excluding works contract services or composite supplies involving goods beyond the prescribed limit) provided to the Central Government, State Government, Union Territory, Local Authority or Governmental Authority, by way of any activity in relation to functions entrusted under Article 243G (Panchayats) or Article 243W (Municipalities).

 

Conditions for Exemption.

For GST exemption to apply:

1. The recipient must be a Local Authority (Gram Panchayat / Municipality)
2. The supply must be a pure service
3. The service must be directly related to functions entrusted under Article 243G or 243W, read with the Eleventh or Twelfth Schedule

 

6.     CBIC Clarifications – Circular No. 206/18/2023-GST dated 31.10.2023.

To remove interpretational ambiguities regarding the scope of exemption under Sr. No. 3 and 3A of Notification No. 12/2017-CTR, the Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 206/18/2023-GST dated 31.10.2023, providing important clarifications through illustrative cases.

 

6.1 District Mineral Foundation Trusts (DMFTs): -

District Mineral Foundation Trusts (DMFTs) are set up by State Governments under the Mines and Minerals (Development and Regulation) Act, 1957 to work for the interest and benefit of persons and areas affected by mining-related operations.

 

DMFTs regulate the receipt and utilisation of Mineral Development Funds and undertake activities such as:

• Drinking water supply
• Environmental protection
• Health care facilities
• Education
• Welfare of women and children
• Supply of medical equipment

 

These activities closely correspond to functions listed in the Eleventh Schedule and Twelfth Schedule of the Constitution. Further, the services are provided free of charge, and no consideration is recovered from beneficiaries.

 

CBIC Clarification.
It has been clarified that DMFTs set up by State Governments qualify as ‘Governmental Authorities’ and are therefore eligible for the same GST exemptions as available to other Governmental Authorities under Notification No. 12/2017-CTR.

 

6.2 Horticulture / Horticulture Works Provided to CPWD: -

The Central Public Works Department (CPWD) undertakes development and maintenance of public parks, gardens and green areas in government residential colonies, government offices and other public spaces.

Maintenance of community assets, urban forestry, environmental protection and promotion of ecological aspects are functions entrusted to:

• Panchayats under Article 243G read with Sr. No. 29 of the Eleventh Schedule, and
• Municipalities under Article 243W read with Sr. No. 8 of the Twelfth Schedule.

 

CBIC Clarification.
Supply of:

• Pure services, or
• Composite supplies of goods and services where the value of goods does not exceed 25% of the total value,

by way of horticulture / horticulture works provided to CPWD are eligible for GST exemption under Serial No. 3 and 3A of Notification No. 12/2017-CTR.

 

7.     Taxability in Other Cases.

Where:

• The service is not connected with constitutionally entrusted functions, or
• The supply involves works contract or significant supply of goods,

such services shall be taxable under GST at the applicable rate, as no specific exemption applies.

 

8.     Concluding Remarks.

The GST treatment of services supplied to Panchayats, Municipalities and Governmental Authorities is function-centric rather than entity-centric. While Gram Panchayats and similar bodies clearly qualify as Local Authorities or Governmental Authorities, GST exemption is available only where services are intrinsically connected to constitutional functions entrusted under Articles 243G or 243W, as further clarified by CBIC Circular No. 206/18/2023-GST.

 

Each transaction must therefore be examined on the basis of nature of service, recipient status, and constitutional nexus.

 

9.     Here are relevant AAR / interpretation references.

1) Karnataka AAR – M/s. Manish Manpower Agency (KAR ADRG 03/2024): -

• The Karnataka Authority for Advance Ruling (AAR) held that manpower services supplied to Panchayats (Zilla & Taluk Panchayat) may be exempt under Notification No. 12/2017-CT (Rate) if both conditions are satisfied:
1. The supplies are pure services, and
2. They are in relation to any function entrusted to a Panchayat under Article 243G.

 

• The AAR explicitly recognized that Zilla Panchayat / Taluk Panchayat qualify as “Local Authorities” under Section 2(69) CGST, satisfying the first condition for exemption.

 

However, the AAR also clarified that:

• Certain manpower services such as Data Entry Operators, Drivers, FDA/SDA, Typists etc. do not qualify as related to Panchayat functions and are therefore taxable.

 

 

2) Andhra Pradesh AAR – Manpower Supply Exemption: -

• In AAR No.07/AP/GS1/2023, the Andhra Pradesh AAR ruled that services such as manpower supply to Government / Local Authorities / Government Entities would be eligible for GST exemption under Notification 12/2017-CT(R) only if the services relate to functions entrusted to    Panchayats/Municipalities under Constitution.

 

Eleventh Schedule

 

1. Agriculture, including agricultural extension.

2. Land improvement, implementation of land reforms, land consolidation and soil conservation.

3. Minor irrigation, water management and watershed development.

4. Animal husbandry, dairying and poultry.

5. Fisheries.

6. Social forestry and farm forestry.

7. Minor forest produce.

8. Small scale industries, including food processing industries.

9. Khadi, village and cottage industries.

10. Rural housing.

11. Drinking water.

12. Fuel and fodder.

13. Roads, culverts, bridges, ferries, waterways and other means of communication.

14. Rural electrification, including distribution of electricity.

15. Non-conventional energy sources.

16. Poverty alleviation programme.

17. Education, including primary and secondary schools.

18. Technical training and vocational education.

19. Adult and non-formal education.

20. Libraries.

21. Cultural activities.

22. Markets and fairs.

23. Health and sanitation, including hospitals, primary health centres and dispensaries.

24. Family welfare.

25. Women and child development.

26. Social welfare, including welfare of the handicapped and mentally retarded.

27. Welfare of the weaker sections, and in particular, of the Scheduled Castes and the Scheduled Tribes.

28. Public distribution system.

29. Maintenance of community assets.

 

Twelfth Schedule

 

1. Urban planning including town planning.

2. Regulation of land-use and construction of buildings.

3. Planning for economic and social development.

4. Roads and bridges.

5. Water supply for domestic, industrial and commercial purposes.

6. Public health, sanitation conservancy and solid waste management.

7. Fire services.

8. Urban forestry, protection of the environment and promotion of ecological aspects.

9. Safeguarding the interests of weaker sections of society, including the handicapped and mentally retarded.

10. Slum improvement and upgradation.

11. Urban poverty alleviation.

12. Provision of urban amenities and facilities such as parks, gardens, playgrounds.

13. Promotion of cultural, educational and aesthetic aspects.

14. Burials and burial grounds; cremations, cremation grounds; and electric crematoriums.

15. Cattle pounds; prevention of cruelty to animals.

16. Vital statistics including registration of births and deaths.

17. Public amenities including street lighting, parking lots, bus stops and public conveniences.

18. Regulation of slaughter houses and tanneries.