GST impact on the infrastructure sector


The infrastructure sector is the backbone of the Indian economy. The government has been making efforts to boost the sector through various schemes and incentives.

According to the government, total infrastructure spending is expected to be about 10% of GDP (gross domestic product) during the 12th Five-Year Plan (2012–17), up from 7.6% during the previous Plan. A total of 6,604km has been constructed out of the 15,000km target set for national highways in 2016-17, says the ministry of road transport and highways. The Airports Authority of India plans to develop city-side infrastructure at 13 regional airports, with help from private entities for building of hotels, car parks and other facilities. Significant allocations have been made to power, urban development and inland waterways sectors. The above initiatives show the firm commitment of the government to infrastructure.

Given this, the recent introduction of the goods and services tax (GST) could have significant impact in terms of spending on infrastructure.

In the pre-GST era, there was dichotomy in the applicable indirect tax regime relevant to infrastructure. While Central laws provided exemptions and concessions, state VAT (value-added tax) and entry tax laws were applicable to goods procured. In addition, the cascading effect of Central and state indirect taxes was a concern, due to a high base for levy of respective taxes and a restrictive credit mechanism. There was also litigation at the Central and state levels on classification of contracts, valuation, jurisdiction of state on inter-state works contracts and other issues.

GST being a concurrent tax on supply of goods and services is expected to bring in predictability for infrastructure projects. There are some changes that would have an impact on indirect taxation—taxability of works contracts being one. As works contracts are limited to only immovable properties, turnkey contracts which do not result in immovable property would now be treated as composite supplies. Further, valuation of goods and services in works contracts, which has typically sparked differences between Central and state indirect tax authorities, would now be put to rest with the legislation laying down unambiguously that works contracts would be regarded as supply of services. Other contracts which do not result in immovable property could be regarded as composite supplies, and depending on the principal supply, tax liability would arise either as a supply of goods or services.

While there is apprehension that a flat GST rate of 18% would lead to increased incidence on infrastructure projects, availability of input tax credits would neutralize such concerns. Thus, contractors and suppliers could look forward to a simpler and efficient tax regime.

For project owners, the new legislation may not lead to a conducive future. Credit restrictions on works contracts resulting in an immovable property coupled with increase in GST rates could increase cost outlay. Already, exemptions and concessions to infrastructure have been completely withdrawn. This could also lead to increased working capital requirements. Project cost could rise due to increased burden of indirect taxes.

Power is an important component of infrastructure. Electricity being outside the purview of GST, power generation companies would continue to have indirect taxes as a significant cost factor. Further, an increase in rate of services and withdrawal of exemptions and concessions for power projects is expected to have an impact on power companies.

Similarly, withdrawal of exemptions for road, water supply and sewerage projects sponsored by government and local authorities is expected to increase government spend. However, availability of higher pool of input tax credit in the hands of the contractors could help neutralize such increases. So introduction of GST seems to be a mixed bag for the infra sector—predictability and efficiency being the key advantages, while non-inclusion of sub-sectors, higher rate and certain restrictions are negatives.

On direct taxes, the government intends to bring down the corporate tax rate in a phased manner and correspondingly phase out profit-linked tax incentives.

While most such tax incentives are phased out from 1 April, the industry is yet to witness an impactful reduction. So far, the reduction in the base corporate tax rate from 30% to 25% is for companies with revenue up to Rs50 crore in financial year 2015-16. Infrastructure requires considerable investment and it is likely that it may not be the beneficiary of reduced corporate tax rate. Also, as gestation is high, it is unlikely to generate enough profit in the initial years to absorb compulsory depreciation charge under the Income Tax Act. Consequently, there could be incidence of minimum alternate tax (MAT) of approximately 18.5%, on the book profit.

Industry has been demanding withdrawal of MAT, and the finance minister had acknowledged this demand, although there has been no relief so far. The only respite has been to allow set-off of MAT paid against future tax liability for 15 years as against 10 years. The intent and willingness of the current government to go the extra mile for overall growth, has been well received. With time, industry expects more clarity in GST and a reduction in corporate tax rate to make up for withdrawal of direct tax incentives. These measures will propel much-needed growth for India’s infrastructure.

22nd GST Council Meeting

The 22nd GST Council Meeting was held at New Delhi on the 6th of October 2017. In the meeting, various decisions and changes pertaining to GST return filing, composition scheme, GST rates have been announced. The various measures announced in the 22nd GST Council will tremendously improve ease of compliance for SMEs. In this article, we summarise the key decisions made in the 22nd GST Council Meeting.

GST Return Filing

All regular taxpayers registered under GST were currently required to file 4 GST returns every month namely GSTR 3B, GSTR 1, GSTR 2 and GSTR 3. Filing 4 GST returns a month and maintaining GST compliance was a major burden for small businesses that have limited resources. Hence, to reduce the compliance burden for small businesses and improve ease of doing business, a decision was taken to reduce the number of GST returns for small businesses.

GST Return Filing for SMEs

Small and medium enterprises (SMEs) with an annual aggregate turnover of less than Rs.1.5 crores will no longer be required to file GSTR 1, GSTR 2 and GSTR 3 return every month. Instead, SMEs will be allowed to file quarterly GST returns and make quarterly GST payments, whether or not enrolled under the GST composition scheme.

SMEs will be allowed to file quarterly GST returns starting from the October – December 2017 quarter. For now, all regular taxpayers will be required to file monthly GSTR 1, GSTR 2, GSTR 3 and GSTR 3B return for the months of July, August and September 2017. The due date for July 2017 GSTR 1 return, GSTR 2 return and GSTR 3 return has been announced. The due dates for August and September GSTR 1, GSTR 2 and GSTR 3 returns will be announced shortly.

GST Return Filing for Businesses with Over Rs.1.5 Crore Turnover

All persons having GST registration with a turnover of more than Rs.1.5 crore per year will be required to file monthly GST returns in form GSTR 1, GSTR 2 and GSTR 3. GSTR 3B will have to be filed by all taxpayers for the months of July to December 2017, irrespective of annual aggregate turnover.

GST Registration

GST registration was earlier mandatorily required for any person who undertook inter-state (selling goods or services from one state to another state) irrespective of aggregate annual turnover. In the 22nd GST Council, it has been decided to exempt service providers from this criteria. Hence, service providers will now be allowed to undertake inter-state sales of upto Rs.20 lakhs without obtaining GST registration.

It is important to note that only service providers have been provided this exception. Any person supply goods will still be required to obtain GST registration mandatorily, if they undertake inter-state sales.

Reverse Charge Mechanism Suspended

The 22nd GST Council has decided to suspend the GST reverse charge mechanism. Under reverse charge, the recipient of a service is required to pay GST on behalf of the supplier.  Sub-section (4) of section 9 of the CGST Act, 2017 pertains to GST reverse charge and is reproduced below for reference:

“The central tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.”

Since, registered taxpayers were required to pay GST on reverse charge basis when they purchased from an unregistered person (Most times a micro or small business), many registered business stopped transacting with micro and small businesses. Hence, the GST Council has decided to suspend the reverse charge mechanism. Now, registered taxpayers can purchase from unregistered persons without having to pay GST on reverse charge basis. This measure will provide a major boost to micro, small and medium businesses.

GST on Advances Received NOT Required for SMEs

As per GST rules, whenever a taxable person receives advance, an advance receipt voucher must be issued and the GST on the advance received must be remitted to the Government. In case supply was later not provided and refund of advance was provided to the customer, then the supplier would have to claim refund. This caused tremendous difficulty for small and medium businesses.

As per the decision of 22nd GST Council, it has now been decided that taxpayers having annual aggregate turnover up to Rs. 1.5 crores will not be required to pay GST at the time of receipt of advances on account of supply of goods. The GST on such advance received will be payable only when the supply of goods is made.

Transportation of Goods by GTA

Goods Transport Agency were not extending services to unregistered persons and were in many cases requesting GSTIN for transporting goods. The GST Council in the 22nd meeting has clarified that GTAs will not need any GSTIN for providing transportation services, thereby removing the hardship faced by SMEs.

GST Composition Scheme

The GST Composition Scheme can be availed by SME taxpayers to reduce compliance and tax burden. The 22nd GST Council has decided to form a Group of Ministers (GoM) to examine measures to make the composition scheme more attractive for SMEs.

Further, entities with an aggregate turnover of upto Rs.75 lakhs were only eligible for enrolling under the GST Composition Scheme. The 22nd GST Council has decided to increase the aggregate turnover to Rs.1 crore.The aggregate turnover threshold for special category States, except Jammu & Kashmir and Uttarakhand, has also been increased to Rs. 75 lacs from Rs. 50 lacs. The turnover threshold for Jammu & Kashmir and Uttarakhand has been fixed at Rs. 1 crore.  With the increase in aggregate turnover threshold, more SMEs will now be eligible for enrolment under the GST Composition Scheme.

Due Date for Enrolling under GST Composition Scheme Extended

The due date for enrolling under the increased threshold has been made available to both migrated and new taxpayers up to 31.03.2018. Also, once a business has enrolled under the Composition Scheme, the scheme will become operational from the 1st date of the succeeding date.

Due Date of first GSTR 4 Return for Composition Scheme Dealers Extended

The due date for filing GSTR 4 return for July to September 2017 by taxpayers registered under  composition scheme has been extended to 15.11.2017. Also entities opting for composition scheme will have to now file GSTR 4 return only for that portion of the quarter from when the scheme becomes operational and can file returns as a normal taxpayer for the preceding tax period.

Implementation of TDS and TCS Provisions Postponed

TDS and TCS provisions of the GST is applicable to certain Government Department and E-Commerce Operators. To help the taxpayer ecosystem gradually absorb the changes in the indirect tax regime, the Government has decided to postpone the TDS/TCS registration and operationalisation to 31st March 2018.

E-Way Bill Implementation Postponed

 

As per E-Way bill rules, any transportation of goods with a value of more than Rs.50,000 would require an e-way bill. The e-way bill rules were earlier supposed to be implemented before December 2017. The GST Council has now decided to postpone the implementation of e-way bill provisions and rules to 1st January 2018. Hence, w-way bill rules will be operationalised in a staggered manner across India from 1st January 2018 to 1st April 2018.