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The new order of a dynamic GST would see all the key indirect tax legislations being subsumed, and will also facilitate compliance, says DEEPAK PREMNARAYEN.
India has a unique indirect tax landscape for the infrastructure sector. While the sector enjoys a plethora of concessions and exemptions, the very nature of the contracting structure is troubled with a large amount of complexities, more so on the EPC contracting side. The current indirect tax regime is operating under a complex tax environment due to multiplicity of taxes, obligation of compliances, and the cascading effects of the these taxes. The new order of a dynamic GST would see all the key indirect tax legislations being subsumed, and will also facilitate compliance.
Need for clarity
The contracts in this segment are usually of four categories and types: offshore supply contracts, offshore services contracts, onshore supply contracts, and onshore services contracts.
VAT and service tax are levied on onshore services, which leads to high tax burden and also litigations on treatment of activities as ´supply of goods´ or ´provision of service´ contracts, or whether such activities should be treated as a composite works contract.
The GST regime may seek to address the certain inherent tax risks that EPC contractors currently face in the existing tax regime. For example, the entire puzzle of local v/s interstate works contract leads to dispute, as to which state should get the VAT/CST revenues. Likewise, the litigation over in-transit sales models should also see clarity. It is felt that contract prices under EPC should come down on account of a new efficient tax structure, which will also help project owners.
However, the GST law treats works contracts as a service, which is still difficult to comprehend due to the peculiar and varied nature of arrangements which involve multiple scopes of work and multiple participants for either a full project, or for part of a single project.
It is felt that classification of treatment of works contract, nature of arrangement, ease in contracting structuring (of material and service portion), etc., may help in better understanding of the subject. It is said that the entire contract is treated as a service contract; the tax liability will depend on the valuation mechanism adopted for such contracts.
It is thus required that future contracts should be framed after review with the project owners and contractors in light of the GST provisions, and all the four categories should be clubbed together under a broad category of works contract.
The GST law contains provisions for inclusion of free-of-cost supplies received by an EPC contractor in the taxable base for discharging GST. It is presumed that free-of-cost supplies by project owners to contractors will be liable to GST, which effectively would then result in a charge and charge-back of such taxes between the project owner and EPC contractor. This will increase tax incidence, especially in scenarios where the project owner is not eligible to take credit. The FOC supplies could then flow as a cash flow, which may raise tax issues.
There are a few action points that emerge. First, to access possible impact if no exemption/concessional duty is provided under GST; second, appeal to the government to consider a liberal credit regime, and third, to ensure there is no tax cascading and granting of deemed export benefit status for key infra projects. A few sectors may also not benefit from GST. For instance, renewable energy projects may be affected adversely, mainly due to withdrawal of exemptions. These projects currently enjoy VAT and entry tax exemptions in some states, and also lower excise duty rates on the key high value equipment.
In the new GST regime, it is not clear if these exemptions would continue. If not, then it would result in increase in project costs, resulting in higher capital employed, that would in turn lead to increase in power tariffs. It is also not clear if there would be any GST levy on generation and distribution of power, which will have an impact on the power tariff.
In cement, GST is likely to be positive, as the industry is likely to benefit from lower cost of logistics. The current incidence of tax is about 25 per cent, which will be brought down realistically.
Likewise, logistics will see positive developments as 20 per cent to 30 per cent of the cost can be reconfigured downwards through supply chains interlinkages. Advisory and consultancy services will be costly; abolition of tax holidays and exemptions will also be negative. Overall, it´s a mixed bag. Manufacturing gets competitive, while services become costly.
Restructuring of contracts
There might be cases where execution may be across multiple states/locations, though invoices might be raised at one location. As of now, contractors are required to segregate contract values for the purpose of determining VAT/CST liability in different states. Under GST, invoices need to be split state-wise to comply with the norms. The IT system will be in retuned to be in line with the place of supply for various transactions. It also requires reworking of accounting procedures for transactions in contract restructuring, so that they comply with the GST regulations. The GST law comes as a mixed bag for infra projects, depending on the kind of the project and the procurements. Given the thrust of the government on infra projects, through the PPP route, the industry should pursue, and the government should consider the possibility, of either making the supplies to infra projects to be zero rates, or alternatively to remove the restriction on non-availment of credits on works contracts or services received for setting up these projects.
Deepak Premnarayen is President, Indian Merchants Chamber. He serves as Chairman, FirstRand Bank India, and Non-Executive Director, FirstRand Global Board, South Africa.