The long-pending implementation of the goods and services tax (GST) is expected to bring a significant change to the economic environment in which businesses operate. The construction sector is no exception. The new tax regime, which proposes to condense various indirect taxes into a single GST, is likely to make things simpler for engineering, procurement and construction (EPC) firms engaged in both the manufacturing of goods and rendering of services. At present, the construction/EPC sector is plagued by issues arising on account of various indirect taxes applicable to different aspects of the business.
Under the GST, all works contracts (including EPC contracts) are proposed to be taxed as services. This, in turn, will result in a reduction in the multiplicity of taxes, the removal of overlapping taxes (thus reducing the cascading effect), less ambiguity (that otherwise leads to tax disputes) and ease in contract structuring.
On the flip side, an increase in some costs is imminent. The new tax framework proposes credit restrictions where “works contract services” are supplied for the construction of immovable property. On account of this, project cost is likely to be impacted due to the non-availability of credit. Besides, the proposed exclusion of some petroleum products, a key input in carrying out construction activities (for transportation, etc.), will also impact the cost structure of construction firms. Further, excise duty will continue to be levied on specified petroleum products, while the state governments will continue to impose value added tax on all petroleum products.
For the subcontracting industry, the GST will be a classic value-added system with subcontractor taxes being passed through. The sub-contractor will not need to maintain local stocks and undertake local sales, as credit under the GST will be available on intra-state supplies.
As far as equipment manufacturers and raw material suppliers are concerned, the impact of the GST hinges on some crucial elements. On the positive side, the implementation of the GST is expected to facilitate the seamless flow of credit (which will reduce costs) and ease taxes on transactions involving the interstate movement of goods, thereby enabling fair valuations for the supply chain. However, there are challenges with respect to the tax treatment of supply of the equipment under warranty, increased compliance needs (which will push up costs), system updating and anti-profiteering provisions. One of the crucial raw materials for construction, cement stands to benefit from the implementation of the GST. The tax rates for the cement sector are expected to decline to 18-20 per cent under the GST, as against the existing tax rates of 27-32 per cent. The sector is also expected to benefit from the lower cost of logistics under the new regime.
Another significant impact of the GST will be reflected in the structuring of contracts. Under the GST regime, key changes in contract structuring will be related to chargeability, valuations, credits, compliance, reporting, the point of tax imposition and the place of supply of goods. Bid evaluation criteria will also change, as the cost of a project (including the applicable tax cost) is calculated at the bid stage, which makes it important to factor in the increase in costs that may arise in case the contract time frame spills into the GST regime.
Going forward, EPC players must begin preparing for the implementation of the GST, if they have not done so already. They need to analyse the provisions of the draft law in detail, conduct impact assessment studies, review contracts, renegotiate if necessary, upgrade their systems and make representations to the government.