Project costs may increase owing to GST credit restrictions in many sectors

Project costs and pricing would need to be reworked after taking into account amended tax rates on the input and output side, as well as input credits, says
Satish Parakh, Managing Director, Ashoka Buildcon Ltd.

How are you gearing up to cope with the new GST regime?
The Model GST Law specifically treats a ´works contract´ (including any transfer of property in goods in the execution of such contract) as a ´service´. However, determining the nature of a particular agreement, or a set of agreements, for a project (i.e., whether it qualifies as a works contract or not) would still be critical from the perspective of the place of supply, the taxable value, the applicable rate of tax and the compliances to be undertaken given the peculiar and varied nature of arrangements in the infrastructure sector, involving multiple scopes of work and multiple participants (consortium) for either a full project or for parts of a single project.

The key implications of such change would include:

Are there any pain areas identified that will still need resolution before the new GST regime comes into force?
The starting point for the sector could be revisiting the existing contracts which are expected to continue partly in the GST regime. In such cases, the ´change in law´ clause would be significant in determining the contractual liabilities of the parties at the time of implementation of GST. In case such clauses are not adequately worded, the parties to the contract can now work on the same by way of an addendum. Further, the ´tax´ clause should include adequate provision for ascertaining the liability to bear any additional tax burden arising on account of change in law. There may be a requirement to revisit the transaction model and agreement terms to make the scope definite and clear to remove any possible ambiguities; Impact of rate to be analysed: Since the entire contract is to be treated as ´service´, the tax incidence would need to be analysed vis-a-vis the current and GST regime. Removal of lower composition rates may entail higher output tax liability, and the same would depend on the valuation mechanism adopted for such contracts under the GST law.

Free of cost (´FOC´) supplies by project owners to contractors appears to be liable to GST. Thereafter, the contractor may need to include value of such free supplies in the value of his services, thereby increasing the tax incidence, especially in scenarios where the project owner is not eligible to take credit, or where the contractor avails any exemption. Else, the FOC supplies would create a cash flow issue.

Representation may need to be filed for clear provisions with regard to taxability of goods supplied on interstate basis, or imported as part of works contract under GST. Project costs and pricing would need to be reworked after taking into account amended tax rates on the input and output side, as well as input credits. This re-calibration, perhaps, would require the maximum preparedness.

Furthermore, project cost may increase owing to GST credit restrictions in many sectors, depending upon the end use – notably, specific restrictions are proposed under input tax credit norms with regard to goods and services acquired for the purpose of construction of immovable property. The said restriction is likely to have an adverse impact on the infrastructure sector.

How would the GST differ for infrastructure developers vis-a-vis infra contractors?
Impact on contractors
GST is likely to benefit the contractor due to seamless credit flow and the proposed treatment of works contract as ´services´. Coupled with subsuming of taxes such as excise, CST, entry tax, etc., GST would bring in the much-needed efficiencies for the infrastructure sector on the cost side;

The GST regime is also likely to take care of certain inherent tax risks that contractors presently carry under the existing tax regime. For example, the issue of local versus inter-state works contract leading to the debate and dispute as to which state should get the VAT/ CST revenues on such supplies should end as it is clear that GST revenues are shared between the Centre and the project state. Likewise, the litigation around taxation of in-transit sales model should also abate with both the limbs of the transaction now being taxed, with free flow of credit. Further, it contains clear provisions for inclusion of free-of-cost supplies received by the contractor in the taxable base for discharging GST, thereby ending any debate on this issue.

Impact on developers
Credit restrictions on goods & services in the execution of works contract which result in construction of immovable property continue to exist for the developers. The net impact would have to be calculated as net of the overall reduction in project cost on one side and ineligibility of setting up credits coupled with increased GST rates on the other;

While VAT is applicable, the roads, railways, ports and airports currently enjoy service tax exemptions. The Model GST Law does not contain the exemption list or nil-rated schedule. Hence, it is unclear if the current exemptions would continue.

In case of power projects, it is not clear if there would be any GST levy on generation and distribution of power, which, in turn, would have an impact on the power tariff.

How would you 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?
It emerges that in case of periodic or continuous supply of goods & services, the GST Act would not apply on advances received prior to the GST law for goods & services to be provided during the GST regime, provided tax has been paid on the same. This provision does not cater to the scenario where tax has not been paid, but is payable under the earlier law post enactment of the GST regime. Also, there is no provision for treatment of supplies prior to the GST law, where either the invoice has not been raised for the same, or payment has not been received, or tax has not been paid, prior to enactment of the GST law. This could result in dual taxation, both under the previous regime as well as under the GST regime. Contractors would need to examine the coverage of the transition provision to see whether implications for all its possible transactions during the transition period are clear. Accordingly, suitable representation may need to be filed for clear transition provisions.