Kerala AAR Rules GST Payable on Lockdown Payments to Manpower Supplier Despite No Work Rendered

Introduction

In a significant ruling for tax compliance in exceptional circumstances, the Kerala Authority for Advance Ruling (AAR) has held that Goods and Services Tax (GST) is applicable on interim payments made by the Vikram Sarabhai Space Centre (VSSC) to a manpower supplier during the COVID-19 lockdown period, even though no physical services were provided by the deployed workers. The decision, issued on October 9, 2024, in Advance Ruling No. KER/31/2024, addresses queries from M/s. The Kerala State Ex-Servicemen League (KSESL), a charitable society providing employment opportunities to ex-servicemen through contract-based manpower services. The bench, comprising Shri. Jomy Jacob IRS (Additional Commissioner of Central Tax, Member) and Shri. Mansur M.I. (Joint Commissioner of State Tax, Member), emphasized that such payments constitute consideration for a continuing supply of manpower services under the Central Goods and Services Tax (CGST) Act, 2017. This ruling clarifies the tax implications of government directives treating lockdown absences as 'on duty' for outsourced staff, impacting similar arrangements in public sector undertakings.

The case arises from payments disbursed between March 23, 2020, and May 31, 2020, amid the nationwide lockdown imposed to curb the pandemic. KSESL, which supplies ex-servicemen as office drivers, messengers, and medical attendants to VSSC, received these funds without deducting or remitting GST, arguing they were mere financial support rather than payment for services. The AAR's determination rejects this view, reinforcing the taxable nature of manpower recruitment services at 18% GST, regardless of temporary disruptions. For legal professionals handling GST audits, compliance for welfare organizations, or contracts with government entities, this precedent underscores the robustness of contractual obligations in tax liability assessments.

Case Background

The Kerala State Ex-Servicemen League (KSESL) is a registered charitable society under the Travancore-Cochin Societies Registration Act, 1955, affiliated with the Indian Ex-Servicemen League. Its primary mission is to secure employment for early-retired Armed Forces veterans, facilitating contract-based roles in government departments and public sector undertakings, particularly in Kerala. KSESL acts as an intermediary, submitting panels of eligible ex-servicemen to employers like VSSC upon request. Once selected, a contract is executed between KSESL and the employer, outlining wages, code of conduct, and other terms. Monthly, the employer remits the full wage amount to KSESL, which disburses it to the employees after deducting applicable GST. Notably, KSESL claims no commission or profit from these transactions, positioning itself as a non-commercial welfare entity overseen by the Zila Sainik Welfare Office and the Directorate of Sainik Welfare.

In the instant matter, KSESL held a subsisting contract with VSSC, a premier space research organization under the Department of Space, Government of India, for supplying manpower in support roles such as office drivers, messengers, and medical attendants. The nationwide lockdown triggered by the COVID-19 outbreak, commencing March 23, 2020, suspended all physical work. Despite this, VSSC made part payments—termed interim wages—to KSESL for onward disbursement to the affected workers. These payments were sanctioned pursuant to Office Memorandum (OM) F.No. 23(4)/E.Coord/2020/I dated March 23, 2020, issued by the Ministry of Finance's Department of Expenditure. The OM directed Central Government departments, attached offices, and autonomous bodies to treat outsourced, contractual, and casual staff required to stay home due to lockdown as 'on duty' and ensure payment of necessary wages.

A follow-up OM dated May 20, 2020, extended these measures until May 31, 2020, aiming to mitigate economic hardship for vulnerable workers. KSESL received these funds but did not issue tax invoices, as no services were rendered, and thus did not remit GST. The entire amount was passed on to the employees via bank transfers. Seeking clarity, KSESL approached the Kerala AAR on December 22, 2022 (ARN: AD3211220057100), posing two key questions: (1) Whether GST applies to such wages/interim payments received from VSSC during the lockdown; and (2) Whether any exemption is available for these amounts. Personal hearings were conducted virtually on June 21, 2024, and a rehearing on June 20, 2025, due to changes in the AAR composition, with KSESL represented by Chartered Accountant Sri. Sangeeth Kumar.

This background highlights the tension between humanitarian support during a crisis and the statutory framework of GST, where manpower supply is classified as a taxable service under Heading 9985 of the GST tariff. The jurisdictional officer offered no comments, indicating no ongoing proceedings against KSESL.

Arguments Presented

KSESL's contentions centered on the non-commercial, welfare-oriented nature of its operations and the exceptional context of the lockdown. As a charitable society, KSESL argued it neither engages in business nor retains any income from the wages it disburses; the funds merely pass through as per employer statements, with GST routinely deducted and remitted only on amounts tied to actual duties performed. For the lockdown period, they emphasized that no services were provided—employees were confined at home, unable to report for work—rendering the payments as pure interim financial aid or subsistence allowance, not consideration for a supply under Section 7 of the CGST Act. Referencing the government OMs, KSESL portrayed the disbursals as ex gratia support mandated by the Central Government to protect outsourced workers, akin to welfare grants outside GST's ambit. They further contended that without tax invoices (as no supply occurred), GST liability cannot arise, and any demand would impose undue burden on ex-servicemen's limited earnings. KSESL highlighted its compliance history, noting regular GST remittances on normal operations and production of audit documents, while clarifying no commission is charged, thus no additional tax basis exists.

The Kerala AAR, while not presenting formal counter-arguments from a respondent (as this is an advance ruling application), analyzed the issue through the lens of statutory provisions and government directives in its discussion. The authority viewed the payments as integral to the ongoing manpower supply contract, not detached welfare. It rejected the pure agent or pass-through argument, stating that even direct wage recoveries form part of the total consideration for taxable manpower services under Section 15 of the CGST Act. The OMs were interpreted not as creating ex gratia payments but as preserving the contractual quid pro quo by deeming the period 'on duty,' thereby maintaining the supply's continuity. The AAR noted the absence of specific exemptions in Notification No. 12/2017-CT(R) for lockdown scenarios and clarified that manpower recruitment services remain taxable at 18%, irrespective of physical performance disruptions. Factual points included the existing contract's validity, VSSC's regularization of payments post-lockdown without GST deduction, and the legal fiction of 'on duty' status, which precluded classification as compensation for non-performance or frustration of contract.

These arguments underscore a core dispute: whether crisis-driven payments sever the tax nexus or merely adapt it to extraordinary conditions.

Legal Analysis

The Kerala AAR's reasoning is grounded in the foundational definitions and valuation principles of the CGST Act, 2017. Central to the analysis is Section 7, which defines 'supply' inclusively to encompass all forms of consideration for goods or services in the course or furtherance of business. Manpower recruitment or supply services, classified under SAC 9985, qualify as a 'service' taxable at 18% without threshold exemptions for such providers. The authority clarified that the subsisting contract between KSESL and VSSC constituted an ongoing supply, not interrupted by the lockdown. The government OMs (March 23, 2020, and May 20, 2020) were pivotal: by treating absences as 'on duty,' they ensured payments under the contract, preserving the employer-employee relationship and the service provider's role. This legal fiction transformed potential non-performance into deemed fulfillment, making the interim wages 'contractual consideration' under Section 15(1), which values supply as the transaction value excluding only pure agent reimbursements—but KSESL did not qualify as a pure agent, as it facilitated the supply itself.

No precedents from higher courts were directly cited, as this is an advance ruling, but the AAR drew on interpretive guidelines from the GST Council's notifications and CBIC clarifications on manpower services. For instance, it referenced the principle that wage recoveries in labor contracts are includible in the supply value, aligning with rulings like those in Maharashtra AAR on similar outsourcing (though not explicitly named). The decision distinguishes between ex gratia payments (non-taxable if not linked to supply) and wage advances (taxable as advances under Section 2(31)). Here, the OMs explicitly tied payments to the contract, ruling out the former. Section 13(2) on time of supply was implicitly addressed: even without invoices, liability arises on payment receipt for continuous supplies.

Broader distinctions include the non-applicability of force majeure or frustration doctrines under the Indian Contract Act, 1872, as the OMs proactively bridged the gap. The ruling integrates external sources, such as news reports on the decision, which echo the AAR's emphasis on protecting workers without exempting tax obligations. This analysis ensures GST's uniformity, preventing revenue leakage in public contracts while acknowledging welfare intents.

Key Observations

The AAR's judgment yields several pivotal excerpts that illuminate its rationale:

• "The services provided by KSESL to VSSC fall under the category of Manpower Recruitment Services. Accordingly, the payments received from VSSC are considered a taxable supply under the CGST Act. The fact that the entire amount was paid to the employees does not affect the taxability of the supply, as GST is applicable on the total consideration received for manpower services."

This underscores the inclusive valuation of consideration, rejecting pass-through exemptions.

• "Under Sections 7 and 15 of the CGST Act, 2017, such consideration forms the value of taxable supply (no pure-agent carve-out is attracted), and in the absence of any specific exemption under Notification No. 12/2017-CT(R), GST is leviable at the applicable rate on the full amount."

Highlighting statutory hooks for taxability without special relief for pandemic scenarios.

• "The office memorandum issued by the Central Government directed that contractual, casual, and outsourced staff be treated as ‘on duty’ during the lockdown and be paid accordingly, even if they were required to stay home. While this was aimed at protecting the interests of the workers, it does not impact the applicability of GST on the services provided."

Balancing humanitarian directives with fiscal responsibilities.

• "These OMs do not conceive the payments as ex gratia or damages/compensation for non-performance; rather, they deem the period as ‘on duty’ and mandate payment under the subsisting contract of engagement."

Clarifying the OMs' role in sustaining, not severing, the supply chain.

These observations provide direct insight into the AAR's interpretive approach, emphasizing continuity over disruption.

Court's Decision

The Kerala AAR unequivocally answered both questions in the affirmative for taxability and negative for exemption. On Question 1: "Yes. GST is applicable on manpower services provided on the basis of the mutual agreement between the supplier, KSESL to the recipient of service, VSSC. No specific exemption is eligible for the consideration allowed to the employees for such supply of services." On Question 2: "No. GST exemption is not available for the amount received as wages from VSSC during lock down period as it is treated as duty."

The authority ordered KSESL to regularize GST payments on the disputed amounts, implying retrospective compliance through revised returns or assessments. Practically, this means the supplier must compute 18% GST on the full interim wages (CGST 9% + SGST 9%), potentially leading to cascaded credits for VSSC but increased liability for welfare intermediaries like KSESL, who may need to recover from end-beneficiaries or absorb costs.

Implications are far-reaching for future cases involving government contracts during disruptions like natural disasters or strikes. It establishes that deemed performance under executive directives does not trigger exemptions, reinforcing GST's broad base. For ex-servicemen leagues and similar NGOs, this mandates meticulous invoice issuance and tax withholding even in crises, possibly straining thin margins. Public sector entities must now factor GST outflows into budgeting for outsourced labor, while taxpayers gain certainty against aggressive exemptions claims. In a post-pandemic landscape, this ruling may influence audits of similar payments across India, prompting legislative tweaks for targeted relief. Overall, it prioritizes revenue integrity, ensuring welfare measures do not inadvertently erode the tax framework.