The Central Board of Indirect Taxes and Customs (CBIC) has issued a game-changing notification effective from July 15, 2024. This exemption applies to services provided by Special Purpose Vehicles (SPVs) to the Indian Railways. India’s Dedicated Freight Corridor Corporation of India Ltd (DFCCIL), a vital SPV of the Indian Railways, is poised to benefit significantly from this exemption, boosting its financial model.
India’s Dedicated Freight Corridor Corporation of India Ltd (DFCCIL), an SPV under the Indian Railways, will be exempt from the 18% Goods and Services Tax. This strategic move is expected to eliminate the need for a revised revenue model or alterations in freight rates.
This exemption specifically targets the tax obligations on track access charges – payments made for accessing the rail network. These charges represent a fixed cost for the DFCCIL, which had previously amounted to an estimated ₹5,000 crore and was projected to increase with the corridor’s expansion.
On July 12, the CBIC officially notified the GST exemption for services rendered by the Indian Railways to the public and by SPVs to the Railways. This exemption takes effect from July 15, 2024.
According to the notification, services provided by SPVs to the Indian Railways—such as allowing the Railways to utilize infrastructure built and owned by the SPVs during the concession period in exchange for consideration—are now exempt from GST. Additionally, maintenance services supplied by the Indian Railways to SPVs concerning this infrastructure are also exempt.
A straightforward interpretation of this notification indicates that track access charges, which are remittances from the Railways, are now exempt from GST. Consequently, there is no need to reclassify such charges under a different accounting category or increase freight rates for corridor users.
The GST Challenge
Typically, remittances between government entities or departments are GST-exempt. However, as an SPV, DFCCIL operates as a separate entity providing track services, unlike other zones categorized by the Railways. Revenue generated by DFCCIL is credited to the Railways and subsequently remitted, encompassing fixed and variable costs including operations, maintenance, interest, land lease, employee expenses, and other overheads.
DFCCIL functions on a reimbursement model, primarily compensated by the Indian Railways through track access charges. Interestingly, DFCCIL has received support in the form of loans from multilateral agencies such as the Japan International Cooperation Agency (JICA).
This exemption is expected to streamline financial operations, reduce costs, and enhance the efficiency of the Dedicated Freight Corridor, positioning it as a cornerstone in India’s rail infrastructure growth.
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