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

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.

By: ENS Economic Bureau | New Delhi | Published:May 20, 2017 2:50 am
GST council, Tax slab, 4 slab tax rate, tax rate, goods and services tax bill, India economy, business news, indian express news 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.

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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  1. V
    Venkatesh Palanisami
    Aug 16, 2017 at 1:03 pm
    Please give the mail to government side contract work for roads bridges building GST tax details
    Reply
    1. G
      G N Enterprises
      Aug 13, 2017 at 4:08 pm
      Hello Sir Pl. clarify which slab is applicable as we have AMC business and there are basically two types of AMC, one which is normal AMC, where only services are rendered and one which is comprehensive which involves both labour and parts, the AMC is for Chillers ( large HVAC equipments which are ed into building, not sure even though these are classified as Plant Machinary whether these falls under moveable or immoveble property, In present tax scenario, both vat and service tax is paid on the fixed value ( not 100 ) comprehensive AMC invoicing ( cascading impact and issues on input credit at our customer end), under the GST law, how the treatment will change considering the definition of work contract tax and composite supply, what will be the classification and nature of such comprehensive AMCs, Thanks
      Reply
      1. A
        ajay kumar
        Aug 8, 2017 at 4:45 pm
        i am govt. contractor in works labour and material are used for completion of a particular works and my total turnover is below 75 lacs and my business is executed in the jurisdiction my of state kindly advised me can i opt composition scheme in gst
        Reply
        1. I
          Ishvar kanjiyani
          Aug 5, 2017 at 12:47 pm
          Basically i am fall in works contract services. I purchased material at different rates like 12 , 18 and 28 , When i purchased material and supplied to construction sites and issues invoice at purchased rate, I supplied my labour on different different times so when i supply my labour to construction sites, at what GST rate i issue my invoice to him???. Please give me solution for above Question.
          Reply
          1. V
            Vikas yadav
            Jul 29, 2017 at 11:39 pm
            I am Railways contractor doing Railway Track Maintenance work which is purely a labour contract no material is supplied by how much GST i have to pay please reply
            Reply
            1. P
              puhazhenthi
              Jul 27, 2017 at 9:45 pm
              How much GST amount of Work contract of civil
              Reply
              1. A
                Atul
                Jul 25, 2017 at 11:45 pm
                How will GST paid on railway work contract like conservancy .
                Reply
                1. S
                  subrata
                  Jul 23, 2017 at 9:11 pm
                  DEAR/Madam i Am small business holder nature of job printing material supplier,to various organizacation west bengal.like printing of leaf late flex banner,total job made by the labor . supply of seal stamp. publicity material .so i want know annual turn over if bellow 2500000/ lac or increase up to 3000000/-lac only on which slabI avail the gst rate or one question if i avail the composition scheme any problem kindly send your opinion pl regards subrata
                  Reply
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