GST… What´s in it for infra?

India´s ambitious infrastructure development plans hinge largely upon a successful transition from the current multiple taxes regime to the new uniform taxation code of the Goods and Services Tax (GST). Is the industry ready to meet the April 1, 2017 deadline? We do a status check…

The Goods and Services Tax (GST) has been a long time coming. India Infrastructure Incorporated (read developers and contractors), especially infra services providers, are now gearing up to know the incremental (or negative) impact the proposed GST regime will unleash upon their respective businesses.

Service industry CEOs want to get their act together well before the April 1, 2017 deadline, when the uniform tax regime for India is set to be implemented across the board, to bring all Indian businesses under a single tax blanket.

Assessing the quantum of change that the new levy will have on their current fundamentals of business, has now become the pet obsession of India Inc.

Till the newly constituted GST Council, set up by the Union government last month, covers the entire corporate spectrum and finalises the rate of GST applicable to each sector (with the process to conclude within six months), apprehension and anxiety is the mainstay within the infrastructure fraternity.

Obviously, industry captains will be happy, if the new GST tax rates effectively reduce their tax liability vis-a-vis what they are currently paying under the variable levies regime that includes Value Added Tax (VAT), Central and state sales taxes, Central and state excise duties, besides Customs import duties.

But as they say, the devil is in the details.
Stakeholders are poring over the fine print to get a grip on the situation to come.

First salvos
The Indian Merchants Chamber (IMC) was quick to muster a team of industry specialists to forecast and try to preempt higher-than-reasonable GST taxes. The team of specialists deliberated and made an assessment, after which the IMC dashed off a representation to Union Finance Minister Arun Jaitley on August 31, 2016. This representation seeks multiple points of clarity and changes to the model GST draft Bill circulated by the Centre in June 2016 (see box for details).

The private sector is also individually making its assessments on what the GST portends for its order book position. Says Girish Gangal, CFO – HCC (E&C) and Senior Vice President (Group Taxation), ´Most of our customers and 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.´

He notes that many questions remain unanswered for both infrastructure developers as well as contractors and states. Gangal explains, ´While it is informed in the Model GST Law that a ´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. Works contract service being a major supply of service in the country, there must be adequate guidelines in the law in respect of transitional arrangements, credit availability, etc., for project contracts.´

Vineet Baid, CEO, Falcon Autotech, is more optimistic and says, ´Businesses will now redesign the supply chains to remove taxation bias. This reshaping of supply chains by other sectors is set to favour the logistics sector, creating multiple opportunities. We anticipate a sharp increase in the demand for warehouse automation, larger warehouses, high tonnage trucks and logistics management software. Supply chain consultants will see high demand for network planning and optimisation projects. Overall, we are expecting to see organised warehousing to witness significant upsurge.´

Baid re-emphasises that GST is the biggest tax reform of the country, and that it will transform the way of doing business. ´Infrastructure being the lifeline of the nation, enjoys a number of tax concessions and exemptions at both Central and state levels. However, it is not yet clear if these exemptions would continue under the GST regime as well.

If these exemptions are not extended, then the cost of such projects could rise. We eagerly await the details and we hope that the concessions and exemptions are retained in the final law,´ he says.

´On the positive side, GST makes a clear distinction in taxation for work contracts, which would be beneficial for the sector. This could reduce cost and ambiguity,´ adds Baid.

The fine print
Vivek Pachisia, Partner (Indirect Tax Services), E&Y, explains the cumbersome nature of multiple registrations and returns under the new tax regime. ´The IT services sector will need to file five to six returns for every state, every month. So if a firm is operating in, say, 10 states, it would have to file 50 to 60 returns every month under the GST regime.´

He feels that the implications would be similar for infrastructure services providers, and as a whole, the possible scenario does not portend well for India´s developers and contractors in the infrastructure sector.

Though various industry chambers have given their suggestions on different aspects of the Model GST Law provisions released in June 2016, one of the biggest challenges likely to be faced by the industry is with regard to not getting credit of the GST paid on previous purchases (or inputs) on account of mismatch in the figures appearing in the outward/inward returns. The onus will be upon sellers and the ultimate consumers to ensure that the entire value chain involved in the transaction is also GST compliant. ´Though it is a pain area, I think it is a necessary pain that a corporate will have to undergo,´ says Pachisia, commenting that such upheavals are common whenever a major change occurs in the taxation system.

Agreeing with this assessment, Dr Shailendra Chouksey, Whole-Time Director of JK Lakshmi Cement and President of the Cement Manufacturers´ Association, says, ´There are certain other uncertainties which can become pain areas if not addressed appropriately by the GST Council. For example, corporate India has made huge investments on the back of assurances from Central and state governments in many states for continuity of Excise/VAT exemptions for a pre-committed period. Based on the documents which are in the public domain, there is no answer on the fate of these exemptions, which is a matter of concern for those in Corporate India with many residual years for completion of these periods.´

He adds, ´Another pain area would be the exclusion of certain duties and levies which are not under the ambit of GST, like electricity duty, royalty, etc. Keeping them out of GST can increase the input costs for power-consuming and mineral-based industries, especially like the core commodity, cement.´

Red tape
Another CEO, a veteran industrial infrastructure executive tells Infrastructure Today under condition of anonymity, ´Even otherwise, (till GST comes into force), firms have been filing returns in each state. My company has retail businesses in 18 states, hotels in six states and an IT business spread across five states. The government must simplify processes so that multiplicity of tax procedures is curbed under GST.´

Elaborating further, he notes, ´In India, we are divided by so many Acts and legislations despite being a single nation. Each arm of our government operates independently. Even in the financial capital of the country, Mumbai, state infrastructure players like MMRDA, CIDCO, MSRDC, MHADA and even the BMC operate distinctly from each other.

´On the other hand, take a look at Europe that has introduced uniform processes for all nations within the continent. The sovereign status of individual nations is undermined to an extent, but this was done in a concerted effort to boost business. Some compromises have to be made, but there is also the need to reduce the pain in the implementation of GST.´

While the IMC has stopped short of requesting a deferment of the new GST from its scheduled April 1, 2017 date for going on stream, an industry specialist, who was involved in the process, conveys the collective sense of foreboding amongst the entire team from the industry body that deliberated on the Model GST Bill.

The executive, who preferred not to be named, has some scathing comments for the mandarins of the Finance Ministry who drafted the model legislation. ´There was an all-pervading sense about probable negative implications of the imminent GST regime, from the way the Model GST Bill draft was fleshed out. One expert said the Bill has to be scrapped in its existing form. The draft GST Bill seems to be a document fleshed out by the bureaucracy and is very apparently a ´cut-paste´ job.´ However, our CEO source, who also served the Maharashtra government as an Indian Administrative Service (IAS) officer before joining the corporate world, disagrees. He says, ´I doubt the GST is the manifestation of only bureaucratic efforts. Legal and taxation specialists were certainly involved in the process. Besides, the GST was drafted by the erstwhile Congress-led government at the Centre, to which the BJP had raised objections. Now, it is the BJP-led government that has propounded the new tax regime and you find the Congress is objecting. But in the midst of all this reversed political positioning, the GST has undergone a 360-degree review, and several iterations to the Bill have been carried out.´

This CEO´s speak is clearly evidenced by Indian Prime Minister Narendra Modi himself who has said that the GST was a work in progress his government had inherited, while adding that he would not take all the credit for its implementation. The CEO further states, ´There are three important requirements for the GST transition in India. First, we need political leaders across the board to arrive at a consensus, similar to what was achieved before surgical strikes were launched in Pakistan by our government.

´Second, it is never the state´s intention to kill business potential through high taxes. The IT sector was the beneficiary of tax exemptions in India, and should also be credited for being able to leverage this light-handed taxation and register its global footprint successfully. It is but natural that other sectors would complain about the preferential treatment meted out to such sunrise sectors.

´And third, it is not only the services sector that needs an impetus, but also the manufacturing industry which will be the creator of jobs using technological innovations, moving ahead.´

However, the corporate executive adds, ´GST has lacunae related to Value Added Tax (VAT) and sales tax, with the sheer number of registrations required and the need to file multiple monthly returns.´

He adds, ´Input credit will be the biggest disaster under the GST taxation law for big corporates like Vodafone and Reliance. They may be billing under their Mumbai jurisdictions, but may be taxed for different regions under GST. The draft GST is a bureaucratic response that lacks legal acumen. There should have been legal experts on the Union government panel that drafted the Model GST Bill.´

According to Pratik Jain, Partner, PwC India, ´In order to safeguard infrastructure projects which are of national importance, the current regime provides for various benefits in Central Excise, Customs and service tax laws. Such concessions vary depending on the nature of projects and transactions. In case of power projects, since electricity is not liable to VAT, CST, or excise duty, there are exemptions from excise/Customs duty on procurements for setting up of mega power projects.´

Jain elaborates, ´A power project developer is allowed to procure goods on an inter-state basis at a concessional rate of 2 per cent. Similarly, there are service tax exemptions on construction and installation activities carried out for railway, airport and port projects. The above exemptions do help in reducing the total project cost.´

On the impending GST regime, Jain says, ´Under GST, the expectation is that the exemptions would be limited to ensure a seamless credit chain. With respect to the infrastructure sector, the challenge would be that the project developer or owner would not have output GST liability. For instance, it is expected that electricity generated may not be liable to GST. Therefore, in such a case, the tax paid on procurements would continue to be a cost for the developer. If the exemptions pertaining to the infrastructure sector are pruned, there may be a significant increase in the project cost for ongoing as well as future projects.´

Jain´s advice to FM Jaitley is for necessary measures to ensure project costs do not increase on account of GST. ´For this purpose, the government may evaluate if supplies to projects of national importance can be considered as ´zero-rated´ or classified as ´deemed exports´ under GST. This would ensure that no GST is recovered by the contractors from the project owner, and at the same time, a contractor would continue to be eligible for availing credit of the tax paid on its procurements,´ he adds.

His solution to preempt GST turbulence for contractors of infrastructure projects: ´GST would lead to a likely change in tax costs for infrastructure projects. It would be essential to ensure suitable contractual coverage to recover any potential increase in costs from project owners. Also, it would be worthwhile to identify any potential opportunities for contract restructuring.´

Jain points out, ´On the execution front, if the project is a turnkey project, both VAT and service tax are applicable currently. Under GST, it has been clarified that turnkey contracts (referred to as ´works contracts´) should qualify as ´service´. This should simplify the taxation in the hands of the contractors. However, it would be important that exact mechanism/guidelines are provided in the law as to how contractors would need to comply under GST in case of turnkey contracts.´

Jain says that being a continuous service, GST should be payable on completion of a milestone. However, there could be movement of goods during the course of such milestones. The GST law should provide that no separate GST liability should be payable on such movement of goods and prescribe the documents to be carried along with the goods to support the said position, says the tax expert.

´The credit provisions, as currently drafted, create doubt with regard to availability of credits on all procurements used in execution of a turnkey contract resulting in immovable property. It would be important that there is no ambiguity with regard to eligibility of the credit of the contractors executing the project, and there is no case of any GST cost for them,´ he says.

The Union government on its part has set up the GST Council that will announce the effective tax rates for individual industry sectors, after concerted rounds of deliberations to finalise sector-specific GST rates.

It is ironical, that the erstwhile rulers of the country – the Indian National Congress led by Sonia Gandhi, is demanding a cap of 18 per cent on the GST tax. This has set the proverbial cat amongst the pigeons, with the service industry experiencing palpitations over how much higher (from the current 15 per cent they are now taxed) will the new tariff be pegged at.

According to Jain, GST is an opportunity for the Centre to actually deliver on its promise on the ease-of-doing-business front. ´It should be ensured that necessary measures are taken to preempt any adversarial impact on the infrastructure sector. The GST tax will no doubt be the biggest development in the history of Indian taxation. It should, however, go down in history for being a seamless transition to a progressive tax regime, and not for the reasons that cause unease in the infrastructure business.´

MAGNA CARTA
The IMC has the following recommendations for the Finance Minister:

1)Input Tax Credit (ITC)

• The ITC mechanism must be made broad-based, and the GST hurdle on availment of credits of GST paid on inputs, input services and capital goods should be removed.
• The severe condition, (´draconian´, as one GST critic put it) of payment of tax by suppliers to the taxman before availing the credit, should be removed.
• Provisions relating to matching, reversal and reclaim of ITC should be deferred for five years.
• Justification: ´The seamless flow of credit is an integral part of any GST system worldwide,´ argues the IMC representation.

2)SME sector and job work

• There should be a threshold increase from Rs 10 lakh to Rs 25 lakh.
• A general composition scheme for turnover up to Rs 2 crore is needed.
• Business specific composition schemes should be in line with the existing scheme under state VAT.
• Existing job work exemptions should be continued.
• A comprehensive SME Code (read simplified procedures and compliances) should be put in place.
• Justification: After all, ´the segment contributes to 50 per cent of India´s Gross Domestic Product and economy. Hence, any adverse impact needs to be minimised,´ IMC argues.

3)Valuation of goods and services

• The industry body wants clarity on circumstances to reject transaction value between two unrelated parties, valuation for captive consumption, valuation of services between head office/branches, valuation in case of cost allocation of common services and trade/volume discounts.
• Dual taxation vis-a-vis Customs law should be avoided.
• Justification: As the IMC emphasises, ´The sector is prone to high level of litigation with large financial implications.´

4)Key business processes

• Remove compulsion of state-wise registrations.
• Define an appropriate transaction threshold for reverse charge.
• Provision of unjust enrichment in refunds should be removed.
• A robust refund mechanism should be introduced.
• Provision of monthly returns should be restricted to large taxpayers.
• Justification: The IMC advises Union Finance Minister Arun Jaitley on this issue, ´The GST provisions are unlikely to advance the cause of ease of doing business and are more likely to raise costs of compliance.´