Worst GST Impact on ongoing public and private sector projects

Contractors/Builders welcome GST but they seek the Finance Minister’s attention

Consider extending the composition levy for works contract up to the specified limit of Rs. 75 Lakhs turnover in a year as a relief for contractors

The exemption was available for construction and related work pertaining to road, bridge, tunnel or terminal for road transportation. Similarly, the exemption was available to construction and related works for railways

Mumbai: Builders’ Association of India (BAI) is an apex all India body of Engineering Construction Contractors and Real Estate Companies founded in 1941, with more than 18,000 business entities as members through its 160 plus centres (Branches) throughout the country. Regional Associations Affiliated to BAI from indirect membership of more than 1,00,000. The fundamental aim of the Association is to bring about all round improvements in the construction sector while striving towards resolution of operational as well as policy level problems faced by the construction industry. This involves making efforts to obtain from policy makers and authorities, the level of attention that the construction industry deserves in view of its tremendous contribution and importance to the economy.

While Association welcomes GST, but the following concerns for which they seek the Finance Minister’s attention. A letter from the President of BAI, H. N. Vijaya Raghava Reddy was submitted to his office on 30th July 2017.

1. Ongoing Government Projects

Notification No. 2512012 under the Service Tax regime provided for an exemption in respect of various construction and related projects when provided to Government or local authorities specifically in relation to the canal, dam, irrigation projects, and water and sewerage projects.

Similarly, the exemption was available for any construction and related work carried out by the Government where the contracts had been executed prior 01.03.2015 and the exemption was available up to 01.04.2020 through Notification.

The exemption was available for construction and related work pertaining to road, bridge, tunnel or terminal for road transportation.

Similarly, the exemption was available to construction and related works for railways, single residential units by way of ongoing exemption for contracts executed prior to 01 .03.2015 and the exemption was available up to 01 .04.2020.

Most of these works are carried out by Government and specifically State Government under contracts where tax has not been factored based on the exemptions. Given the fact that these are all ongoing contracts, the suitable exemption must be introduced to ensure that ongoing projects are not affected.

Tax if any can be imposed on new projects subject to the conditions that the Act itself stipulates payment of the tax portion by the Government to the Contractor.

2. Works Contracts

In the past, the biggest challenge is the work contract was the distinction between material and labour and it was hoped that GST would solve the problem.

GST has solved this problem only partially and has created another issue. In terms of the GST provision as enacted only works contract that results in immovable property are considered as a supply of service with a GST rate of 18%.

All other works contracts will have to be tested under composite supply and if the equipment rate as 28% it could result in the entire contract being taxed at 28%.

Further, works contracts which involve immovable property do not qualify for input tax credit in the hands of the recipient by virtue of Section 17(5) of the CGST Act resulting in the clients refusing to reimburse the GST portion.

It is our request that all works contracts are considered as a supply of services and the Government may even consider having a lower rate of 5%o for all Government works contract. Similarly, the artificial restriction in Section 17(5) should be removed since the construction of the commercial building, warehouses, godowns, shopping malls, factory buildings, factory godowns and other commercial constructions are all affected.

3. Reverse Charge Mechanism – Unregistered Suppliers

While Association can understand the object of reverse charge mechanism for notified categories, imposing GST on the registered person for dealing with an unregistered person has brought our business to a standstill.

In their business builders have to engage small masons, painters, welders, electricians, packers, cleaners, loaders, transporters, caterers, vehicle operators, drivers, cleaners and construction staffs who do not have any registration and many of them are well within the threshold limit of Rs.20 lakhs. However, the provisions do not make any distinction and mandate payment of GST by builders merely because they are registered and these persons are unregistered.

Association request that the provisions may be reviewed or suitable exclusions are even to labour focused industries such as construction.

4. Single residential unit

Under the GST regime, the exemption is given for services by way of pure labour contracts of construction, erection, commissioning, or installation of original works pertaining to a single residential unit otherwise than as a part of a residential complex; while in pre-GST regime, Notification No. 2512012 exemption was given for entire contract.

5. Deduction towards Value of Land

In the case of construction complexes where the element of land is involved along with the composite supply, the deduction towards land value may please be allowed on an actual cost basis or be allowed on the basis of the value available in the Ready Reckoner used for payment of Stamp Duty.

Association requested to finance minister that to consider extending the exemption for entire works contract for the single residential unit. Association also humbly request to consider the valuation of land as mentioned in the representation.

6. Transition

On one hand, the Government agencies are expecting the prices to come down based on the credit on materials but the reality is that majority of the materials are always brought from small dealers who are not required to issue an excise invoice. While the transition provisions indicate that a certain percentage of tax paid would be given back as a release, the proviso to Section 140(3) of the CGST Act, 2017 states that this benefit is not applicable to manufacturers or suppliers of services.

Association request that the transition provision may be suitably amended to ensure that the benefit available to traders are extended to service providers.

7. Rate of Tax

Wooden furniture has moved from a VAT rate of 5%o to a GST rate of 28%. This will kill the organized market and only open up evasion and unorganized sector supplies.

Solid and hollow blocks attract a GST rate of 28% whereas the inputs for these blocks are fly ash which is 0% GST; blue metal which is 5% GST. The element of cement in the hollow block is only 4% and cement is at 28%. There by the credit availability on the input tax is hardly 7% whereas the output rate is 28% which has affected the sale of these products.

Association request to consider a GST rate of 12% for hollow blocks and solid blocks and furniture.

8. Advances received out of GST

Under the GST regime, the advances received are brought under GST. This will put contractors under hardship. The GST paid on advances received is akin to GST paid as advance tax. Finally, setting off the advance against the invoice raised will only have interest impact.

Association request to consider keeping advances received out of GST.

9. Composition Benefit for Works Contract

Under the pre-GST regime, composition benefit was made available under self-exercisable option for works contract.

Association request to consider extending the composition levy for works contract up to the specified limit of Rs. 75 Lakhs turnover in a year as a relief for small contractors. Association would like to be provided with an opportunity to be heard in person to highlight our concerns.