Goods and Services Tax (GST) has been a topic of discussion for quite some time. It was introduced in India on July 1, 2017, to simplify the indirect tax structure and subsume various taxes like VAT, Excise Duty, Service Tax, and others. GST has impacted various industries, and the construction industry is no exception. GST is applicable on construction activities like works contracts, and in this article, we will discuss the impact of GST on government projects and the way forward.
Works Contract is an agreement between two parties where one party undertakes to do work or execute a work for another party. In the construction industry, Works Contract includes any agreement for carrying out any work related to the construction of buildings, bridges, roads, dams, airports, and so on.
Prior to GST, Works Contracts were governed by a separate set of tax laws. However, after the introduction of GST, Works Contracts are governed by the GST laws. GST on Works Contracts is levied based on the nature of the work and the type of contract. The GST rate on Works Contracts is 12%, and it is applicable on the entire contract value, including the cost of materials, labor charges, and other charges.
GST has impacted Works Contracts on Government Projects in various ways. The impact of GST on Works Contracts on Government Projects can be summarized as follows:
Under the previous tax regime, Works Contracts on Government Projects were not subject to service tax, and only the value of material supplied was subject to VAT. However, under GST, Works Contracts on Government Projects are subject to GST at the rate of 12%, which has led to an increase in the tax burden on Works Contractors.
Under GST, Works Contractors are required to comply with various provisions like registration, invoicing, filing of returns, and payment of taxes. This has led to an increase in compliance costs for Works Contractors, especially the small and medium-sized ones.
Under GST, Works Contractors are required to pay GST on the entire contract value, including the cost of materials, labor charges, and other charges. However, the GST paid on the cost of materials is refundable only after the completion of the project. This has led to a delay in payment to Works Contractors.
The increase in tax burden and compliance costs has impacted the profit margins of Works Contractors on Government Projects. The Works Contractors are finding it difficult to pass on the increased tax burden to the Government due to the competitive bidding process.
To mitigate the impact of GST on Works Contracts on Government Projects, the following measures can be taken:
The GST rate on Works Contracts can be rationalized based on the nature of the work and the type of contract. This will reduce the tax burden on Works Contractors and improve the profitability of the construction industry.
The Government can expedite the process of refund of input tax credit to Works Contractors to reduce the impact of GST on their cash flows.
The Government can simplify the compliance procedures under GST for Works Contractors to reduce their compliance costs.
The Government can encourage the use of technology like e-invoicing, e-way bills, and other digital platforms to simplify the compliance procedures and reduce the compliance costs for Works Contractors.
GST has impacted the construction industry, and Works Contracts on Government Projects are no exception. The increase in tax burden and compliance costs has impacted the profitability of Works Contractors. To mitigate the impact of GST on Works Contracts on Government Projects, the Government can rationalize the GST rates, expedite the process of refund of input tax credit, simplify the compliance procedures, and encourage the use of technology.
GST Rates and HSN Code for Wooden Frames, Paintings, Photographs, and Mirrors
GST Payment Under Wrong Head: Penalties
Clarification in relation to GST rate on Services – Sale of Land