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.
GST impact | Background
- 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 impact | Analysis
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.
- Works contracts would be regarded as supply of services, so the valuation of goods and services in works contracts that sparked differences earlier would be put to rest.
- 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 infra projects, availability of input tax credits would neutralize such concerns.
- Exemptions and concessions to infrastructure have been completely withdrawn.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.
- Electricity being outside the purview of GST, power generation companies would continue to have indirect taxes as a significant cost factor
- Withdrawal of exemptions for road, water supply and sewerage projects sponsored by government and local authorities is expected to increase government spend.
GST impact | Conclusion
Therefore, the 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.