Introduction & Background:
Construction industry plays an important role in the development of any country. It is a large sector of Economy of about Rs. 37 lakh crores (as per national accounts statistics, 2019-20). The construction industry in India consists of the Real estate as well as the infrastructure development segment. The Real estate segment consists of construction of residential & office etc. And the infrastructure development segment consists of government contracts such as irrigation contract, water supply, sanitation, and roads etc. Government of India been consistently allocating substantial portion of budget towards the infrastructure development.
Owing to the inherent style of awarding the contracts by the Government, such contracts are termed as ‘works contract’ under tax laws generally. In pre-GST regime, most of them are exempted from service tax and taxed under VAT with composition rates (around 5% without ITC). After GST, the exemptions were discontinued and common rate of 18% with full ITC was brought out. Due to sudden transition to GST, there was requests for rate reduction since most of the contracts were awarded before GST factoring tax component of 5% only and 18% rate is causing extra cash outflow even after ITC adjustment. Accordingly, the rates were slashed down to 12% for most of the Government works with full ITC.
W.e.f. 01.01.2022 , the GST rates were increased from 12% to 18% wherever the works are awarded by Government entity or Government authority. The rates were unchanged if the same works are awarded by Government department or local authority directly .
Recently, GST council in its 47th Council meeting has recommended for rate increase to 18% for all Government works which was followed by issuance of Notification No. 03/2022-C.T (R) dated 13.07.2022.
Works contract involving construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of following rendered to Government or Local authority are earlier taxed at 12% and now increased to 18%
The following works contracts were taxed at 12% (now increased to 18%) irrespective of the recipient status (whether Government or private parties)
The aforesaid concessional rate of 12% was made available to immediate sub-contractor and the successive sub-contractor’s fate is in disputes as of now.
The works involving predominantly earthwork and sub-contract thereof is taxed at 5% hitherto and now increased to 12%.
Reasons for rate increase (as per Government)
One may wonder that the rate increase is ultimately must be reimbursed by the Government only, then what is the logic in increase the tax rates & reimbursing it which do not give any extra revenue to the Government. Despite this revenue neutral situation, following are the reasons stated for rate increase:
> Concessional rates leading to inversion which in turn causing the ITC accumulation which is non-refundable & would become cost.
> The ITC accumulation encouraging fake invoicing (which will be used to pass on such ITC to someone else)
> Cropping up the disputes over the eligibility of concessional rates
> The initial idea is only to have common rate of 18% and only to accommodate for temporary period, the rates were slashed to 12%/5%
> Rate increase & facility of ITC full knock off encourages tax paid procurements
Old rate v. New rates for Ongoing works:
The new rate is effective from 18.07.2022 thereby it is essential to arrive when the new rate would apply to the ongoing works. For this, the Section 14 of CGST Act, 2017 shall be resorted. The brief impact of the sec. 14 is tabulated below:
Scenarios Supply completion date Invoice raised on Payment received on Tax rate
|Scenarios||Supply completion date||Invoice raised on||Payment received on||Tax rate|
The basic logic of the above section is that occurrence of 2 out of 3 events would decide the application of old or new rates.
Impact of the above changes on the existing contracts
The immediate impact would be on the ongoing works since no relaxation from rate increase was given for the same. To claim increased portion of 6% GST, the clauses of the agreement play a vital role. It is to be noted that albeit GST is indirect tax which ideally must be paid by the Supplier after collecting from the customer, but it is settled that the parties can agree for bearing or shifting the incidence to one another i.e. the parties by contract can fix the liability on any one between them as held by the Hon’ble SC in case of Rashtriya Ispat Nigam Ltd. vs. Dewan Chand Ram Saran 2012 (26) STR 289 (S.C.) “The provisions concerning service tax are relevant only as between the appellant as an assessee under the statute and the tax authorities. This statutory provision can be of no relevance to determine the rights and liabilities between the appellant and the respondent as agreed in the contract between two of them. There was nothing in law to prevent the appellant from entering into an agreement with the respondent handling contractor that the burden of any tax arising out of obligations of the respondent under the contract would be borne by the respondent.”
Thus, the terms of contract will have final word on the reimbursement or collection of GST from the Contractee and.
Accordingly, the possible scenarios and the course of action to be taken is tabulated below:
|Sl. No||Price agreed||Course of action|
|1||Exclusive of GST||The additional claim of 6% GST can be claimed with pre-intimation|
|2||Exclusive of GST @12%||Since the parties intended to make GST liability over & above the base price, claim can be made for additional GST 6% subject to the language of other clauses of the agreement|
|3||Inclusive of GST||Plainly the contractor may have to bear the burden since price was agreed to inclusive of GST. However, the rate increase may not be the legitimate expectation or the consensus ad idem of parties to the contract is only for inclusion of GST @ 12%, one may attempt to ask for 6% claim additionally.|
|4||Inclusive of GST 12%||Since the 12% liability was only intended to be included, one can claim additional GST 6%|
|5||Inclusive of GST but with clause for price revision||Since the price is inclusive of GST but facility to price revision is permitted, the other clauses of the agreement play vital role in asking for upward revision considering the GST rate increase|
It may be noted that in case any portion of ITC becoming cost prior to 18.07.2022 would change the dynamics & financial impact of the rate change would vary from absolute of 6% claim.
It is also important to note that section 64A of Sale of goods Act, 1930 specifies that any rate increase or decrease shall be added thereby can be collected additionally from the customers. However, this is subject to the terms of contract agreed and moreover the section application was limited to the sale/purchase of goods. Therefore, wherever the claim for reimbursement of increased portion of GST is being made, conjoint reading of the clauses of the agreement and also the effect of Section 64A, ibid shall be seen.
Further course of action for ongoing works:
The construction contracts are generally long term contracts, where the prices are locked and sudden change in rate of tax will contribute to delay in execution of majority works.
The further course of action for existing contracts can be as follows –
Course of action for prospective contracts
Though it’s been five years since the inception of GST but still it cannot be said that the GST law has achieved stability from the point of view of taxability or collection. Therefore, it is important for contractors to be always ready with dynamic changes which may come in future. To cop-up with the ‘Trial & Error phase of GST’ following safeguards can be exercised –
There were various practical difficulties in getting additional claims owing to GST introduction and resulted in taxpayers either in delaying the GST remittance or defaulting it which has unnecessarily raised the troubles to the Genuine taxpayers. Hence, the Government shall work out the concrete solution to the ongoing projects at least extending the old rate to the ongoing works/existing contracts. Otherwise, the contractors & Government drawn into long litigation or unfruitful consequences.
Acknowledgements to CA Vyankatesh for helping in drafting of this article.
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