GST Liability on Wetland Conversion Fee: Kerala AAAR Upholds RCM in Manappuram Finance Ltd. Case
Background and Overview
The Kerala Appellate Authority for Advance Ruling (AAAR) recently delivered a significant ruling in the matter of In re Manappuram Finance Ltd. (GST AAAR Kerala), addressing a nuanced question of GST applicability on fees paid to the State Government for converting wetland into dryland. The ruling carries important implications for businesses that own classified wetland and seek to repurpose it for commercial or residential development.
At the heart of this dispute was a straightforward yet legally complex question: when an assessee pays a statutory fee to the Kerala Government to reclassify land from wetland to dryland under Section 27A of the Kerala Conservation of Paddy Land and Wetland Act, 2008, does such payment attract GST under the reverse charge mechanism (RCM)?
The AAAR answered this question emphatically in the affirmative, simultaneously ruling that the advance ruling application itself was inadmissible on account of being filed after the transaction had already been completed.
About the Assessee and the Transaction
M/s. Manappuram Finance Ltd., a registered Non-Banking Financial Company (NBFC) bearing GSTIN 32AABCM6882E1ZK, with its registered office at W-4/638A, Manappuram House, Valappad, Thrissur, operates primarily in the domains of gold loans, money transfer, and foreign currency transactions.
The company held approximately 0.5 acres of land in Valapad village, Thrissur District, which was classified as wetland in the village records maintained under the Basic Tax Register (BTR). Seeking to construct an office premises on this land, the company applied to the concerned government authority for reclassification of the land from wetland to dryland. Upon approval, the applicable fee was remitted to the Kerala State Government as required under Section 27A(3) of the Kerala Conservation of Paddy Land and Wetland Act, 2008, as amended by the Kerala Conservation of Paddy Land and Wetland (Amendment) Act, 2018.
After completing this payment, the assessee filed an application before the Authority for Advance Ruling (AAR) to determine whether the fee so paid attracted GST on a reverse charge basis. The Kerala AAR, vide Order No. KER/13/2023 dated 03.04.2023, ruled that GST was indeed payable. Aggrieved by this ruling, the assessee preferred an appeal before the AAAR.
Submissions Made by the Assessee
Primary Contention: No Supply, No Consideration
The assessee mounted a multi-pronged challenge before the AAAR. The central argument was that the fee paid did not constitute consideration for a supply of service within the meaning of Section 7 of the Central Goods and Services Tax Act, 2017 (CGST Act). The assessee submitted that:
- The payment was a statutory fee prescribed under
Section 27Aof the Kerala Conservation of Paddy Land and Wetland Act, 2008, not arising out of any commercial agreement. - The Notice dated 21.10.2020 was a statutory communication requiring an administrative change in land records and could not be equated with a contract for service provision.
- For a transaction to be taxable under
Section 9of the CGST Act, three essential elements must coexist: (a) a supply, (b) consideration, and (c) absence of any applicable exemption. In this case, elements (a) and (b) were both absent.
Exemption Under Notification No. 14/2017-Central Tax (Rate)
The assessee further argued that even if a supply were presumed to exist, the activity qualified for exemption under Notification No. 14/2017-Central Tax (Rate) dated 28.06.2017, which provides that services rendered by the Central or State Government or a local authority in relation to functions entrusted to Panchayats under Article 243G of the Constitution shall be treated as neither a supply of goods nor a supply of services.
The assessee pointed to the Eleventh Schedule of the Constitution, which enumerates subjects that may be entrusted to Panchayats, including:
- Agriculture, including agricultural extension
- Land improvement, implementation of land reforms, land consolidation and soil conservation
- Minor irrigation, water management, and watershed development
It was contended that the administration of land conversion under the Kerala Conservation of Paddy Land and Wetland Act, 2008, which involves ensuring that conversion does not affect water flow to adjoining paddy fields and that conservation measures are implemented, falls squarely within these constitutionally entrusted Panchayat functions. The monitoring role of the Local Level Monitoring Committee constituted at the Panchayat level under Section 5 of the Act was cited to reinforce this connection.