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. D
    diju
    Jun 17, 2017 at 2:12 pm
    i am a contracter ,normally i am doing residential projects.as on gst how much i need to pay as service tax
    Reply
    1. D
      D Manjunath
      Jun 13, 2017 at 9:18 pm
      We are carrying out works contract which includes transfer of property, service transportation. what will be the rate of tax. presently we are charging VAT 14.5 Service tax of 5.25 after the abatement. we are not under composition. Now under GST can i opt for Composition please clarify
      Reply
      1. M
        Manas Dutta
        May 30, 2017 at 5:27 pm
        We made a contract with a building contractor to construct eight nos dwel units @Rs1450/- per sq ft plus service tax @ 6 against each bill being raised by the contractor towards payment as per schedule of payment. Under the new GST regime the contractor is likely to charge 12 GST in lieu of Service Tax leading to higher expenses on our part. It appears that the contractor will have to pay less to buy raw materials. Now how to fix problem on the pre-determined contract rate so that buyer do not incur financial loss and the contractor gains at the cost of the buyer
        Reply
        1. F
          farooqi
          Jun 11, 2017 at 5:02 pm
          as per my knowledge there is no service tax for residential complex having less than 12 units. so there is no question of service tax. kindly check it with your tax consultant.
          Reply