Infrastructure and Construction Sector is no doubt the most important pillars of Developing Economy. In absence of it, no resources can be extracted, no goods and services can be transferred from one place to other as no business is made in open grounds.
What’s been happening so far?
When it comes to taxation, Infrastructure and Construction Sector, generally, face a lot of complexities. Tax is levied at every stage separately, by the Centre and the State, at varying rates i.e. 10.5% / 6% / 4.5% for service tax and different rates by different States, on the value of construction services.
What are the implications of GST on this sector?
- Under the GST system, the tax will be charged only on the value added at each stage by the sub-contractors, main contractors and developers or builders.
- It is a single tax collected at multiple value additions with a full set-off for taxes paid earlier in the value chain by subcontractors and main contractors.
- The inter-credit of different taxes paid in the current regime be a service tax, VAT, CST, etc. to Centre or States are not allowed and thus becomes a part of the cost on the suppliers. Thus, under GST the final buyer/client will bear only the GST charged by the last person i.e. developer or builder.
- GST clearly defines WORKS CONTRACTS as service. Thus, there is:
- Simplified treatment of works contracts, since there would be no multiplicity of taxes.
- Ease in contract structuring as there will be no requirement to divide contracts into material and service portion, as the entire contract would be treated as service. This would be relevant for onshore services contracts entered with project owners undertaking supply of both goods and services.
- Effect on Raw Materials
Most of the Construction projects are carried out using following materials:
|Material||Current Regime||New GST regime Probable Tax %|
|Excise %||VAT %|
Also, the input credit available to manufacturers of these products would increase, and if passed on to the end customers, is likely to result in lower prices. The benefit to other projects will be affected on the basis of ability to offset the input credit of these items with the output tax.
- Effect on basis of Construction Project:
Many real estate projects are developed in a way where the land owner gets a fixed amount of flats in lieu of the transfer of land development rights to the developer. It is known as Joint Development Agreement. barter exchanges are covered in the definition of supply, the law is still vague about the transfer of land rights. The other one is Work Contractor EPC Contracts.
|Joint Development Agreement Model||Work Contracts or EPC Contracts|
|Cost goes Up if land barter comes in the ambit of Supply.||No credit can be taken on goods and services in the execution of Work Contract. Similar to the current tax regime.|
|Capital Lockup (long interval between transfer and ability to set off.||Increases the cost since work contracts specifically defined as Supply|
|Input Credit on Material consumed, Lower cost of Materials (As mentioned in above table)||Lower Input material Cost reduces the Overall price. Though Not a significant difference.|
- Road, Rail and Airport Projects
- Exemption from paying service tax yet liable to pay input tax and service tax to transporter as well as states.
- No improvement in tax credit liability due to Section 17 (4) (c)
- However, for power projects and operational power units that enjoy certain exemptions, will have a negative effect since electricity is outside the ambit of GST and input tax is a cost.
- Compliance Ease
Finally, the benefit of GST will be the ease of compliance that it would offer. Elimination of multiple taxes and tax laws is a certainty. However, “Engineering, Procurement, and Construction” (EPC) contracts spread across multiple states would require contractors to register in multiple states including their site offices due to ?place of supply? concept. Further, all the site offices will require technological upgradations since input credit would be available only after an online reconciliation of tax invoices is done.
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