An Overview on Impact of GST on Construction Industry

Introduction of the Value Added Tax (VAT) at the Central and the State level has been considered to be a major step – an important step forward – in the globe of indirect tax reforms in India. If the VAT is a major improvement over the pre-existing Central excise duty at the national level and the sales tax system at the State level, then the Goods and Services Tax (GST) is an additional important perfection – the next logical step – towards a widespread indirect tax reforms in the country. Initially, it was conceptualized that there would be a national level goods and services tax, however, with the release of First Discussion Paper by the Empowered Committee of the State Finance Ministers on 10.11.2009, it has been made clear that there would be a ―Dual GST‖ in India, taxation power – both by the Centre and the State to levy the taxes on the Goods and Services. Almost 150 countries have introduced GST in some form. While countries such as Singapore and New Zealand tax virtually everything at a single rate, Indonesia has five positive rates, a zero rate and over 30 categories of exemptions. In China, GST applies only to goods and the provision of repairs, replacement and processing services. GST rates of some countries are given below. Country Australia France Canada Germany Japan Singapore Sweden New Zealand Rate of GST 10% 19.6% 5% 19% 5% 7% 25% 15% World over in almost 150 countries there is GST or VAT, which means tax on goods and services. Under the GST scheme, no distinction is made between goods and services for levying of tax. In other words, goods and services attract the same rate of tax. GST is a multi-tier tax where ultimate burden of tax fall on the consumer of goods/ services. It is called as value added tax because at every stage, tax is being paid on the value addition. Under the GST scheme, a person who was liable to pay tax on his output, whether for provision of service or sale of goods, is

● With respect to Tax Threshold The threshold limit for turnover above which GST would be levied will be one area which would have to be strictly looked at. First of all, the threshold limit should not be so low to bother small scale traders and service providers. It also increases the allocation of government resources for such a petty amount of revenue which may be much more costly than the amount of revenue collected. The first impact of setting higher tax threshold would naturally lead to less revenue to the government as the margin of tax base shrinks; second it may have on such small and not so developed states which have set low threshold limit under current VAT regime. ● With respect to nature of taxes The taxes that are generally included in GST would be excise duty, countervailing duty, cess, service tax, and state level VATs among others. Interestingly, there are numerous other states and union taxes that would be still out of GST. ● With respect to number of enactments of statutes There are two types of GST laws, one at a centre level called ‗Central GST (CGST)‘ and the other one at the state level - ‗State GST (SGST)‘. As there seems to have different tax rates for goods and services at the Central Level and at the State Level, and further division based on necessary and other property based on the need, location, geography and resources of each state. ● With respect to Rates of taxation It is true that a tax rate should be devised in accordance with the state‘s necessity of funds. Whenever states feel that they need to raise greater revenues to fund the increased expenditure, then, ideally, they should have power to decide how to increase the revenue. ● With respect to tax management and Infrastructure It depends on the states and the union how they are going to make GST a simple one. Success of any tax reform policy or managerial measures depends on the inherent simplifications of the system, which leads to the high conformity with the administrative measures and policies. This is the major contribution of GST for the business and commerce. At present, there are different state level and centre level indirect tax levies that are compulsory one after another on the supply chain till the time of its utilization. ● Growth of Revenue in States and Union It is expected that the introduction of GST is increase the tax base but lowers down the tax rates and also removes the multiple point this, is leading to higher amount of revenue to both the states and the union. ● Reduces transaction costs and unnecessary wastages If government works in an efficient mode, it may be also possible that a single registration and single compliance will suffice for both SGST and CGST provided government produces effective IT infrastructure and integration of such infrastructure of states level with the union. ● Eliminates the multiplicity of taxation One of the great advantages that a taxpayer can expect from GST is elimination of multiplicity of taxation. The reduction in the number of taxation applicable in a chain of transaction is help to clean up the current mess that is brought by existing indirect tax laws. ● Reduces average tax burdens Under GST mechanism, the cost of tax that consumers have to bear is certain, and GST would reduce the average tax burdens on the consumers. ● Reduces the corruption It is one of the major problems that India is overwhelmed with. We cannot expect anything substantial unless there exists a political will to root it out. This will be a step towards corruption free Indian Revenue Service.

The introduction of GST at the Central level is not only include comprehensively more indirect Central taxes and integrate goods and service taxes for the purpose of set-off relief, but may also lead to revenue gain for the Centre through widening of the dealer base by capturing value addition in the distributive trade and increased compliance. In the GST, both the cascading effects of CENVAT and service tax are removed with set-off, and a constant chain of set-off from the original producer‘s point and

established which reduces the burden of all cascading effects. This is the real meaning of GST, and this is why GST is not simply VAT plus service tax but an improvement over the previous system of VAT and disjointed service tax. Moreover, with the introduction of GST, burden of Central Sales Tax (CST) will also be removed. The GST at the State-level is, therefore, justified for- (a) Additional power of levy of taxation of Services for the States (b) System of comprehensive set-off relief, (c) Subsuming of several taxes in the GST (d) Removal of burden of CST.

Dual GST means, the proposed model will have Two parts called 1. CGST – Central goods and service tax for levied by central Govt. 2. SGST – State goods and service tax levied by state Govt. There would have multiple statute one CGST statute and SGST statute for every state.

Salient features of the proposed model are as follows: (i) The GST shall have two components: one levied by the Centre (referred to as Central GST), and the other levied by the States (referred to as State GST). Rates for Central GST and State GST are approved appropriately, reflecting revenue considerations and acceptability. (ii) The Central GST and the State GST are applicable to all transactions of goods and services made for a consideration except the exempted goods and services. (iii) The Central GST and State GST are to be paid to the accounts of the Centre and the States individually. (iv) Cross utilization of ITC between the Central GST and the State GST are not be permitted goods and services. (v) To the extent feasible, uniform procedure for collection of both Central GST and State GST would be prescribed\ in the respective legislation for Central GST and State GST. (vi) The States are also of the view that Composition/Compounding Scheme for the purpose of GST should have an upper ceiling on gross annual turnover and a floor tax rate with respect to gross annual turnover. (vii) The taxpayer would need to submit periodical returns, in common format as far as possible, to both the Central GST authority and to the concerned State GST authorities.

1. GST provide comprehensive and wider coverage of input credit setoff, you can use service tax credit for the payment of tax on sale of goods etc. 2. CST is removed and need not pay. At present there is no input tax credit available for CST. 3. Many indirect taxes in state and central level included by GST, You need to pay a single GST instead of all other taxes. 4. Uniformity of tax rates across the states 5. Ensure better compliance due to aggregate tax rate reduces. 6. By reducing the tax burden the competitiveness of Indian products in international market is expected to increase and there by development of the nation. 7. Prices of goods are expected to reduce in the long run as the benefits of less tax burden would be passed in to the consumer.

The following indirect taxes from state and central level is going to integrated with GST ● State taxes 1. VAT/Sales tax

3. Luxury tax 4. Taxes on lottery, betting and gambling. 5. State cesses and surcharges in so far as they relate to supply of goods and services. 6. Entry tax not on in lieu of octroi. 7. Purchase tax (This is not sure still under discussion) ● Central Taxes 1. Central Excise Duty. 2. Additional Excise Duty. 3. The Excise Duty levied under the medical and Toiletries Preparation Act 4. Service Tax. 5. Additional Customs Duty, commonly known as countervailing Duty (CVD) 6. Special Additional duty of customs- (SAD) 7. Surcharges 8. Cesses The above taxes dissolve under GST; instead only CGST & SGST exists.

The applicability of taxes is as usual there would be a prescribed limit of annual turnover, also some goods and services are exempted under GST. Threshold for annual turnover for goods and services would be 10 lakh for SGST and threshold of CGST for goods may be 1.5 crore and service would have a separate threshold that too is appropriately high. It is assumed that aggregate total of CGST & SGST would be 20%.

In India, construction and Housing sectors are included in the GST tax base because construction sector is a significant contributor to the national economy.

1. Seamless flow of credits procurement of goods/ services except for few restrictions. Therefore, it would reduce the tax costs substantially in the construction industry. 2. Expected Rate of Tax The GST council has agreed upon the 4 rate structure for levying tax on various goods and services i.e. 5%, 12%, 18% and 28%. It is expected that the rate of GST that may be applicable on this sector would be mostly 12%. There may not be any further abatement/ composition on this rate. Although this rate will be little on the higher side as compared to current tax rates which is between 6% to 10%, however this impact could largely get reduced due to ease in credits availability. 3. Multiple Registrations Concept of centralized registration for all the projects will end and builders having a site in multiple States would be required to obtain registration in each State from where the construction activity/ supplies are being undertaken even though the project is for a very small period or for a small value. Although, this scenario is in existent in the current law for the state taxes but the same will now be done even for the central taxes. 4. Time of Supply in GST Currently, many builders pay taxes on receipt basis (without complying with the point of taxation) in case of service tax i.e. tax is paid only once the monies are received from the customers. However, in the GST regime, tax needs to be paid immediately on earliest of completion of service, rising of invoice or receipt of monies from customers. This could have an impact and could cause blockage of working capital.

● GST is the most logical steps towards the comprehensive indirect tax reform in our country since independence. ● GST is leviable on all supply of goods and provision of services as well combination thereof. All sectors of economy whether the industry, business including Govt. departments and service sector shall have to bear impact of GST. ● All sections of economy viz., big, medium, small scale units, intermediaries, importers, exporters, traders, professionals and

● One of the biggest taxation reforms in India – the Goods and Service Tax (GST) -- is all set to integrate State economies and boost overall growth. ● GST is creating a single, unified Indian market to make the economy stronger. ● Experts say that GST is likely to improve tax collections and Boost India‘s economic development by breaking tax barriers between States and integrating India through a uniform tax rate. ● Under GST, the taxation burden is divided equitably between manufacturing and services, through a lower tax rate by increasing the tax base and minimizing exemptions.

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PG Student, JSPM‘s Imperial College of Engineering and Research, Wagholi, Pune