GST on Toll-Operate-Transfer Arrangements: Understanding the New Special Procedure and Its Practical Implications

Abstract

The October 2026 measures address two different legs of a Toll-Operate-Transfer (TOT) arrangement: the authority’s grant of toll-collection rights and the concessionaire’s operation and maintenance (O&M) services. The former receives a specified exemption; the latter is subject to an escrow-linked payment mechanism. This article explains their different eligibility tests and examines the practical questions that remain around expense identification, tax rates, input tax credit and transition.

1. Identifying the three supplies

A TOT concession combines an upfront concession payment, a right to collect toll and continuing obligations to operate and maintain a road. An analysis confined to who pays cash to whom can obscure the services moving in the opposite direction. A useful starting point is to identify three relationships: the authority grants rights to the concessionaire; the concessionaire undertakes O&M for the authority; and the road user obtains access against toll. Their commercial connection does not, by itself, determine a common GST treatment.

For road-user access, Entry 23 of Notification No. 12/2017-Central Tax (Rate), dated 28 June 2017, already exempts access to a road or bridge against toll. CBIC Circular No. 164/20/2021-GST, dated 6 October 2021, paragraph 7, confirms this treatment. That exemption should not be used as a substitute for analysing the authority’s grant of concession rights or the concessionaire’s O&M supply.

2. Toll-collection rights: a distinct exemption

Notification No. 07/2026-Central Tax (Rate), dated 27 October 2026, inserts Entry 42A under Heading 9973 into Notification No. 12/2017-Central Tax (Rate). It covers the specified grant of exclusive right of way or access, licence and authority to demand, collect and appropriate toll fees by the Central Government, State Government, Union territory, local authority, Governmental Authority or Government Entity. The rate and condition columns are Nil. The amendment takes effect on 1 November 2026.

Entry 42A does not expressly restrict payment to an upfront fee or use TOT as an eligibility label. The official FAQs, published by PIB on 9 October 2026, explain that qualifying upfront and periodic payments are covered, whereas grants by private entities are excluded (Questions 18–21). These are administrative explanations; eligibility must remain anchored to the notified service and grantor.

In practice, a contract labelled a concession is insufficient evidence. The reviewer should identify the rights actually granted and establish the grantor’s status. Assignments, sub-concessions and separately priced ancillary services require their own examination. Nor does an exemption for rights received by a concessionaire establish that all supplies made by that concessionaire are exempt. These are analytical consequences of keeping the suppliers and supplies separate.

3. O&M: the notified class and payment mechanism

Notification No. 10/2026-Central Tax (Rate), dated 27 October 2026, operates under Section 148 of the CGST Act and commences on 1 November 2026. It identifies registered concessionaires supplying O&M to the concessioning authority during the concession period. Its definition requires a TOT agreement granting exclusive toll rights over a road or highway, requiring O&M and an upfront concession fee. The authority must belong to one of the specified public-sector categories.

For this class, central tax is payable on O&M expenses incurred by the concessionaire and charged or debited from the escrow account maintained under the agreement, in the tax period of that charge or debit. The procedure is not an O&M exemption.

Section 148 permits the Government, on the Council’s recommendation and subject to prescribed conditions and safeguards, to notify classes of registered persons and special procedures, including registration, returns, payment and administration. It supplies the enabling procedural power; it should not be described as a standalone charging or exemption provision.

The FAQs explain the commercial rationale as adjustment of expected O&M cost against upfront consideration and link payment to actual escrow-linked expenditure. Questions 22–27 also reject both a universal application to road-maintenance contracts and payment on the entire O&M component at commencement for covered cases.

A drafting distinction matters here. Adjustment from the upfront amount appears in the FAQs; the notification’s definition expressly requires an upfront fee but does not separately reproduce that adjustment condition. The contract should therefore be reviewed against the notified text, with the FAQ explanation identified as guidance. The omission should not itself be presented as a definitive ruling that adjustment is irrelevant in every arrangement.

4. A worked example and the rate question

Assume a registered concessionaire has a qualifying TOT agreement, an upfront fee of ₹500 crore and a contractually maintained escrow account. Its opening uncharged O&M balance on 1 November is nil. During November it incurs ₹80 lakh of qualifying O&M expenses and charges ₹60 lakh to escrow. During December it incurs another ₹95 lakh and charges ₹110 lakh, comprising the remaining ₹20 lakh from November and ₹90 lakh from December. A ₹5 lakh balance remains uncharged at December end. All figures are hypothetical and exclude tax.

On those assumptions, the special-procedure amounts are ₹60 lakh for November and ₹110 lakh for December. At an assumed, independently established GST rate of 18%, the gross output tax would be ₹10.80 lakh and ₹19.80 lakh respectively. For an intra-State supply with matching 9% central and State rates, each component would be ₹5.40 lakh and ₹9.90 lakh. These are gross liabilities before any eligible credit; no return due date or entitlement to credit is assumed.

The 18% rate is illustrative, not prescribed by Notification No. 10/2026. For example, CBIC’s services-rate table records 9% CGST plus 9% SGST for maintenance, repair and installation (except construction) under Heading 9987, serial 25(ii). Whether that entry fits a particular bundled highway O&M supply requires classification of the actual obligations. A contract involving construction or a works contract cannot simply inherit the example’s classification or rate.

5. The escrow record becomes a substantive control

The practical recommendation is a project-wise reconciliation showing opening uncharged expenditure, eligible current expenditure, escrow charges, prior-period carry-forwards and the closing balance. Each charge should trace to invoices, work certification, expense records and the agreement. An expense ledger entry should not automatically be treated as an escrow debit.

Budget provisions, contractor advances, retention releases, reversals and major-maintenance expenditure deserve separate review. The notification does not supply a complete rule for every such event. A transfer into a reserve is not necessarily evidence that O&M expenditure has been incurred. Similarly, calling an item major maintenance does not establish whether it belongs to the notified O&M supply or to a separate capital project. These are issues for factual classification and interpretation, not settled answers supplied by the notification.

Directly funded expenditure outside escrow is another unresolved case. Neither a permanent exclusion from tax nor unrestricted postponement should be inferred merely because a cost has not passed through the prescribed account. The defensible course is to document the transaction, examine the contract and obtain a reasoned position where the notified mechanism does not clearly fit.

6. Transition and input tax credit

The commencement clause is prospective. The central notification contains no express amnesty, refund entitlement or comprehensive rule for amounts taxed before commencement and later charged to escrow. That silence warrants a transaction-level transition review; it does not establish that all existing agreements are excluded or that all earlier liabilities disappear. This is the author’s interpretation of the text, not a notified transitional concession.

Prepare an opening reconciliation of pre-November expenditure, prior invoices, tax already discharged and subsequent escrow charges. Separate new expenditure from historical balances and identify potential double taxation without assuming that a unilateral return adjustment is authorised. The legal treatment of a pre-commencement expense charged later cannot be settled from the debit date alone.

For input tax credit, distinguish the authority’s exempt outward grant from the concessionaire’s inward receipt of rights and its own taxable O&M and exempt toll-access supplies. Section 17(2) restricts common credit to the portion attributable to taxable, including zero-rated, supplies; Section 16 provides the underlying eligibility framework. Direct attribution, common use and applicable restrictions must be examined. No special ITC entitlement follows from the escrow mechanism, and the example does not assume full recovery of contractor GST.

7. Implementation beyond central tax

A central-tax notification should not be treated as the instrument implementing State tax. Karnataka has separately issued Notification (10/2026), No. FD 59 CSL 2026, dated 31 October 2026, under Section 148 of the Karnataka GST Act, effective 1 November 2026. For another State, the corresponding State instrument must be verified. Where integrated tax or Union territory tax is relevant, the applicable instrument and supply facts must likewise be examined.

8. Conclusion

The measures offer a clearer route through a commercially unusual arrangement, but the two eligibility tests must remain separate. For the rights exemption, examine the grant and the grantor. For the special O&M procedure, establish the notified TOT agreement and trace qualifying expenditure to the contractual escrow account. Sound implementation depends on that evidential chain, a defensible classification and a separately reasoned treatment of transition and credit.