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.
Government has revised the GST rate from 18% to 12% on contracts to Govt vide notification CBEC No 20/2017 dt 22.08.2017.This rate is applicable for own going and new contracts.
1.Construction of building 18% (9+9)
2.Composite supply of works contractWorks contract 18% (9+9)
3.Do–to Govt/Local authority/authority 12% (6+6)