Will GST result in more capital requirement for the infra sector?

It is vital that the government takes a benevolent view to further the growth of infrastructure and continues the exemptions to projects under the GST regime

Updated: Jun 23, 2016 08:53:31 AM UTC
gst_and_infra
While VAT is applicable, the roads, railways, ports and airports currently enjoy service tax exemptions, it is now unclear whether the current exemptions would continue under GST. (Photo: Gritsana P / Shutterstock.com)

The infrastructure sector in India is fairly unique when it comes to indirect taxes. Depending on the kind of projects, it enjoys many exemptions under the central laws, while most of the states charge the applicable VAT / CST / entry tax on goods procured for the project. Also, most of the taxes that are not otherwise exempt are non-creditable and end up as tax costs in the system. The Model GST law seems to address some of these fundamental issues.

What it means for the contractor In its current form, GST would appease 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.  At a macro level, it is expected that any impact of increase in GST rates in the hands of EPC contractor should get negated by incremental GST credits in the procurement chain.

The GST regime also seeks to address certain inherent tax risks that EPC contractors presently carry under the existing tax regime. For instance, the entire conundrum 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 central government 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 EPC contractor in the taxable base for discharging GST, thereby ending any debate on this issue.

May not be such a sweet pill for the project owner
Credit restrictions on goods and services in the “execution of works contract” which result in construction of immovable property continue to exist in the hands of the project owner. For a project owner, 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 the NIL rated schedule. Hence, it is unclear whether the current exemptions would continue under GST.

Renewable energy projects which presently enjoy VAT and entry tax exemptions in some states; and also lower excise duty rates on the key high value equipment may get adversely impacted if the exemption are discontinued under GST which coupled with unavailability of setting up credits, would result in a rise in the project costs resulting in higher capital employed that would, in turn, lead to increase in power tariffs. It is also not clear, if there would be any GST levy on generation and distribution of power, which, in turn, would again have an impact on the power tariff.

In conclusion
Considering the fact that infrastructure is regarded as a measure of development of a nation and GST is a comprehensive tax regime, it is vital that the government takes a benevolent view to further the growth of infrastructure in India and continues the exemptions to such projects under the GST regime, preferably treating them as zero-rated supplies, to avoid any escalation of project costs that in turn would end up requiring even more capital to be deployed, in a sector which is going through a phase of weakening private participation.

-By Prashanth Bhat, Partner, BMR & Associates LLP and Alok Chandna, Associate Director, BMR & Associates LLP

The thoughts and opinions shared here are of the author.

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