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Sep 18 2018

GST: Despite 12% headline rate, work contracts to be cheaper, The Indian Express, work contracts.#Work

GST: Despite 12% headline rate, work contracts to be cheaper

Work contracts

The government has fixed a goods and services tax (GST) rate of 12 per cent for work contracts, giving the impression of a higher burden on the construction sector. However, a closer look suggests that the actual tax incidence under the GST regime would be lower than the existing one, thanks to the facility of input tax credit (ITC) on raw materials. Also, the new indirect tax regime will simplify the extant convoluted tax structure by treating work contracts as only services.

Currently, while the Centre effectively levies a 6 per cent services tax on construction work contracts (after a 60 per cent abatement), states impose value-added tax (VAT) of 1-4.5 per cent. However, the ITC facility is unavailable on the payment of taxes on raw materials like steel and cement now on which the existing tax incidence is quite high and varies from state to state. Work contracts cover both commercial and residential infrastructure projects.

In the GST regime, though, builders will be able to get input tax credit against their payment of taxes on key inputs like steel and cement. While most of the steel products will be taxed at 18 per cent under the GST regime, against the current indirect tax incidence of roughly 17.5 per cent, those of cement will attract 28 per cent, against around 23-24 per cent now.

“The 12 per cent GST rate for work contract may optimally look high but since additional credits will henceforth be available, the total tax impact may be lower than the current indirect tax regime,” said Anita Rastogi, partner (indirect tax) at PwC.

Under the extant indirect tax regime, work contracts usually cover three types of taxable activities: Supply of goods (inputs), services and manufacturing. While the supply of goods attracts VAT, the service tax is imposed on services. If a new item is produced in the process of completing a works contract, the central excise duty is levied on that product.

Sanjay Garg, partner (indirect tax) at KPMG, said the GST regime will bring in the much-needed simplification of the indirect tax structure, as work contracts will be treated only as service. Moreover, the ITC facility will reduce the cost of raw material procurement.

The cost of some of the inputs for work contracts, including steel, will be lower under the new regime, as the government has proposed a GST rate of 5 per cent for coal (which is used in making steel and some other products), much lower than the current effective tax incidence of 11.5 per cent, said analysts.

The GST regime will reduce the cash component of the construction economy, because, to avail of ITC, the raw materials have to be sourced from GST-registered vendors. This will lead to greater tax compliance.

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