Who’s a ‘Local Authority’ Under GST Now? 2025 Redefines It

Who Qualifies as a Local Authority Under GST? The 2025 Bill Brings Clarity

The Finance Bill, 2025 has introduced a pivotal clarification in India’s GST law by defining the previously ambiguous terms “local fund” and “municipal fund” in the context of local authority GST provisions. While this amendment is termed “clarificatory,” it has significant implications for reverse charge mechanisms (RCM), GST exemptions, and concessional rates applicable to transactions involving local authorities.

🧾 Why This Matters: Reverse Charge, Exemptions & Special Status

Under GST, local authorities enjoy a privileged tax status. Many supplies made to or by local authorities are either:

• Exempted
• Taxed at concessional rates, or
• Liable under RCM

Until now, the term “local fund” was undefined in GST law. This created uncertainty—especially for statutory bodies or boards—on whether they qualified as local authorities under Section 2(69) of the CGST Act, 2017.

🧑‍⚖️ What the Finance Bill, 2025 Adds

A new Explanation has been proposed to clarify the meaning of:

• Local fund
• Municipal fund

✅ Defined as: Any fund controlled or managed by an authority of a local self-government, established to discharge civic functions in a Panchayat, municipal, or metropolitan area, and vested with powers to levy and collect taxes, duties, tolls, cess, or fees.

This language echoes the attributes highlighted by the Supreme Court in Union of India v. R.C. Jain (1981 AIR 951), which remains the foundational ruling on identifying local authorities.

📚 Key Case Reference: Union of India v. R.C. Jain

In this case, the SC held that Delhi Development Authority (DDA) qualified as a local authority under the General Clauses Act, 1897 based on its legal authority, control over funds, and civic function role.

However, a recent GST circular post the 55th GST Council Meeting contradicts this view, stating that DDA cannot be treated as a local authority under GST. This inconsistency has created confusion, especially since circulars cannot override Supreme Court judgments (as per CCE v. Ratan Melting & Wire Industries, 2008).

🏛️ Constitutional Backing: The Idea of Local Self-Government

The explanation uses the term “local self-government”, not defined under GST law—but its roots lie in:

• 73rd & 74th Amendments to the Constitution of India
  • Part IX: Panchayats
  • Part IXA: Municipalities

These parts were introduced to democratize governance at the grassroots, allowing elected local bodies to function independently, levy taxes, and manage civic affairs.

🔍 Why It’s Not Just a Clarification

While the Bill terms this change as clarificatory, it may have a retrospective impact on past transactions, tax liabilities, and audits. The new definitions offer clarity but also raise questions:

• Can previously excluded authorities now claim exemptions?
• Will past GST payments under RCM be open to refund claims?
• What if businesses took contrary views based on CBIC circulars?

📌 Key Takeaways for Businesses & Professionals

✅ Reassess vendors or clients categorized under local authority
✅ Check RCM applicability and possible refund eligibility
✅ Monitor GST litigation involving boards like DDA, development authorities
✅ Align compliance with the new explanation effective from Finance Bill, 2025

📊 Summary Table – Local Authority Status at a Glance