GST implementation will ensure seamless credit availability

There are still many clarifications required before an industry impact study can be conducted on the new tax regime, says Girish Gangal, CFO – HCC (E&C) and Senior Vice President (Group Taxation).

How are you gearing up to cope with the new Goods and Services Tax regime? Does it portend well for infrastructure majors?
The most crucial tax reform since Independence, GST aims to iron out a multilayered indirect tax system and usher in a uniform tax structure. This development augurs well for the infrastructure sector. Besides single-window taxation, implementation of GST will ensure seamless credit availability at all levels. It would certainly help if the final GST law and issues relating to the final rate of taxes, exemptions, concessions and treatment thereof are notified at the earliest. The construction industry is also taking up key issues affecting the industry with the government.

At HCC, we are in the process of carrying out the impact study of all our projects and businesses as a whole. However, we would like to seek more clarity on the final GST rates, exemptions, concessions, treatment of deemed exports, supplies to EOUs/SEZs, etc., – which leaves lot of ambiguity in the Model GST Law published by the government.

Are there any pain areas identified that will still need resolution before the new GST regime comes into force?
We as a company, foresee the following hurdles, which needs to be ironed out before the implementation of the GST regime.
Most of our customers/project owners are government bodies. In case the final output tax happens to be more than the existing taxes, claiming the tax differentials from the clients will be a big hurdle as GST is a new method of taxation altogether and not just a change in the rate of tax.

Many questions remain unanswered for both infrastructure developers as well as infrastructure contractors. While it is informed in the Model GST Law that ´works contract service´ is to be categorised as ¨service´, which will attract both CGST and SGST, there is no clarity as to how the billing is to be done when the supply of material and service would happen at different points in time. Since many services are routed through works contracts, there must be adequate guidelines in the law in respect of transitional arrangement, credit availability, etc., for project contracts.
As the GST mechanism is consumption-based, clarity is required on treatment of works contracts, especially with regard to point of taxation, place of provision of service and valuation rules.

GST proposes to tax branch transfers. Transfer of project materials from one site to another is a common phenomenon in the infra industry. Valuation of such transfers for the purpose of discharging GST would be a big hurdle. Similarly there would be frequent transfer of contractors´ equipment from one site to another (both intra- as well as inter-state). The Model GST Law is silent on this aspect. In any case, such movements should be free from GST.

The rates of GST are yet to be decided. Also, the exemptions and concessions, and the treatment thereof, have not been announced. In the absence of clarity, we are unable to carry out a satisfactory impact study. If exemptions are continued, there would be break in the chain of seamless credit flow, resulting in higher cost and a cascading effect.

How would the GST differ for infrastructure developers vis-a-vis infra contractors?
While GST gives clarity for infra contractors, there is very little information available for treatment of the new tax regime for infra developers. Apart from developing infrastructure, most of the developers are contractors too. Presently state VAT laws/service tax provisions provide for deduction of cost of land and composition/abatement rate for sale of flats under construction (before issuance of completion certificate). The Model GST Law is silent on these aspects.

How would HCC be impacted on the remaining/ongoing infrastructure projects that would be completed only after the GST regime comes into force by 2017 vis-a-vis already commissioned projects?
As compared to infrastructure projects completed in the pre-GST era, in case of ongoing projects, which will be completed after GST implementation, the estimated tax cost will have to be derived and for the differences in taxes, the project owner will have to be approached for reimbursement on account of change in legislation. This will be a herculean task for the project and contracts teams.

States have been assured that any loss in revenue due to GST would be compensated for the next five years. Are there any similar implications for the infrastructure sector that need to be provided for by infra developers and contractors?
The infrastructure industry requests the government to instruct all project owners (especially government bodies) to expedite and simplify the process of compensating the companies for difference in tax costs on account of implementation of GST. Further, this would get complicated in view of signed contracts and relevant provisions considered as per erstwhile law which are at variance with the GST provisions. This will require support from the government and project owners, to appropriately reframe contract clauses on taxes.

Clearing the Air
The following key issues are to be addressed for a smooth transition to the GST regime:

• Clarity on transitional provisions, especially for works contracts;
• Exemption from GST for branch transfers to facilitate free movement of materials and equipment;
• Methodology of levy of GST for developers and availability of credit thereof to be clarified;
• Clarity needed on export of services;
• Clarity needed on valuation rules;
• Sufficient time to be given for implementation of GST.