Nihal Kothari, Executive Director, Khaitan & Co, examines the GST implications for infrastructure developers and contractors.
How should the infrastructure industry gear up to cope with the new GST regime expected to come into force from April 1, 2017?
The infrastructure industry has to gear up for the GST implementation considering significant changes in the proposed tax structure for this sector.
GST is expected to remove deficiencies in the existing tax system by providing a simple, uniform tax regime across the country, removing the cascading effect of tax. It will create a common market leading to accelerated economic growth, while requiring each and every sector to relook at their business models and processes to take advantage in the changed scenario.
While addressing many issues faced by taxpayers operating in real estate and infrastructure sector in the present tax system, the model GST law has also put to rest the controversy revolving around divisibility of a works contract for computing taxable value under VAT and service tax. At present VAT as well as service tax is charged on a works contract, both levies overlapping with each other. Real estate, construction and infrastructure development sectors have been suffering from prolonged litigation for many decades due to hyper-technical interpretation by tax authorities on the issue.
The GST law has effectively resolved this problem by categorising a works contract as ´supply of service.´ Accordingly, full value of all works contracts will be treated as consideration for supply of service and all other provisions of the law will be applied accordingly.
The infrastructure and real estate players should also revisit their working capital need as stock transfers from one state to another will be fully taxed. Tax barriers will be removed. Hence, a developer can buy goods from within the state or inter-state with the same tax cost and input tax credit under GST.
The enterprises engaged in this sector also have to look at their contract terms with suppliers and customers, as the rules of the game have changed. For instance, unless the supplier pays the tax and files returns, the customer cannot get input tax credit. The accounting requirement and tax compliance will undergo significant changes and a developer may have to file multiple tax returns each month, adding up to 67 returns in a year. Many players in this sector have not yet started serious efforts to gear up for GST and have a smooth transition. Transition management of partially completed projects is another major area which needs attention to minimise tax losses.
Could you identify the pain areas that still need resolution before the new GST regime comes into force?
Infrastructure development in several sectors like railways, ports and roads, enjoys service tax exemption on construction, erection, commissioning services, etc., as these have high priority for the growth of the economy. While infrastructure is currently receiving patronage under tax laws, the Model GST Law is silent on any exemption or tax concession to the infrastructure sector. How the ´exemption´ is dealt with in the GST regime, will have ramifications for growth of this sector. Mega projects are normally managed by consortiums of experts in the field and generally follow the ´sub-contracting´model for execution. The exempted ´in-transit sale´ facility provided under the CST Act is used to avoid double taxation. In absence of such a provision in the GST Bill, the implementing authority will have to pay GST and claim credit of the tax paid by the vendors. This will increase working capital requirement.
The tax paid on input materials like cement and steel used in construction will not get input tax credit under GST if such construction results in immovable property. It is not clear whether abatement will be provided in valuation of such works contracts. Thus the real estate sector, providing infrastructure to various industries, will not be allowed to avail credit on inputs, even though output services are totally taxable. This is against the spirit of GST and the government should relook at this restriction of input tax credit.
How would the GST differ for infrastructure developers vis-a-vis infra-contractors?
There is restriction on availing of input tax credit in respect of goods and/or services acquired by the principal in the execution of works contract when such contract results in construction of immovable property.
The valuation for the purpose of levy of tax is normally transaction value. There is no clarity in the draft GST law as to whether the value of land (which is not eligible for input tax credit) will be excluded from the transaction value or an abatement will be granted for such purpose as is done under the current tax law.
Does the GST regime portend well for infrastructure development in India?
GST will make India a common market, thereby improving supply chain efficiency, and will help the development of modern logistics and storage facilities. Economic growth will accelerate. These factors augur well for faster development of infrastructure and commercial real estate.
The current indirect tax system is mired in multi-layered taxes levied by the Centre and state governments at different stages of the supply chain, such as excise duty, service tax, central sales tax (CST), value-added tax (VAT), entry tax or octroi duty, among other sector specific taxes like luxury tax, entertainment tax, etc. Multiple taxes fragmented the market with dissimilar tax jurisdiction and made the supply chain inefficient. This system not only leads to high compliance cost for both the governments and taxpayers; it also leads to cascading effect of taxes on cost of indigenous products, adversely affecting their competitiveness. Even exports become uncompetitive. The present complex tax system encouraged inefficient tax led business models, putting a further burden on the consumer.