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Still a work in progress

Still a work in progress

The GST regime will facilitate ease of doing business, but the government has to ensure that there is no adversarial impact on the infrastructure sector during the rollout, says PRATIK JAIN.

The infrastructure sector remains one of the most critical sectors for the Indian economy and has been the focus area of the current government, right from the beginning of its term.

With the recent announcements made by the government on GST, it is clearly evident that the government is moving fast to meet its target to implement the new tax regime from 1 April, 2017. Given the same it is extremely important to assess impact of GST on the infrastructure sector.

A closer look
The current indirect tax structure involves levy of multiple taxes and results in tax cascading. 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.

For instance, 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. Also, a power project developer is allowed to procure goods on inter-state basis at a concessional rate of 2 per cent. Similarly, there are Service Tax exemptions on construction, installation activity carried out for railways, airports and port projects.

The above exemptions do help in reducing the total project cost.

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. Hence, the government should take necessary measures to ensure that the project cost does not increase on account of GST. For this purpose, it 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, the contractor would continue to be eligible for availing credit of the tax paid on its procurements.

Given the above, it is likely that GST would lead to a change in tax costs for infrastructure projects. Hence, it would be essential to consider such a change and 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.

On the execution front, 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 the exact mechanism and guidelines are provided in the law, as to how contractors would need to comply under GST in case of turnkey contracts.

For example, 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 a milestone. The GST law should provide that no separate GST liability should be payable on such movement of goods, and prescribe the documents to carried along with the goods to support the said position.

Further, 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.

To conclude, GST is an opportunity to deliver on ease of doing business in India, and it should be ensured that necessary measures are taken to ensure that there is no adversarial impact on the infrastructure sector.

The author of the article is a Partner with PwC India.

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