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Gst impact on works contract

NAVEEN (Sr.ACCOUNTANT) (241 Points)

27 September 2016

Works contract is having 6% service tax and 7% vat ( in Kerala ) total 13% tax. And vat liability is on receipt basis . In the proposed GST tax rate will be around 20 % . What will be the impact of GST on the works contract industry ?

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4 Replies

Madhukar N Hiregange (Chartered Accountant) (38934 Points)
Replied 02 October 2016

The VAT rate in various States is different. For Kerala the VAT rate of 7% is under compistion or regular will be important as if not under composition then ITC is available. ST across India is as under:

a. If VAT paid on actuals with ITC ( say material cost + margin = 73%) where the cost of material is determinable. Then STR can be paid on 27% x 15% presently. The Excise duty of 12.5 on the material in this case maybe ( 7%) is also a cost of IDT. Entry tax + procurment under CST could be a n additonal cost in soime cases. Therefore presenlty the total taxes borne could be alomost 22%.

b. If VAT is paid on Govt figures then VAT maybe paid on 70% ( 7%) and ST on 40%(6%) + CED ( 7%) + cascading as above. Also around 24%.

c. If VAT paid under compostion- compostion rate +++ Maybe 22%.

If the rate is 18% then works contractors may save monies. However proper documented purchases maybe ensured. Whether the merit rate wouldbe applied + whether composition under GST is availabel to the WC woudl also be relevant.

Sunil Kumar (Indirect Taxation ) (1246 Points)
Replied 07 October 2016

India towards GST

The Current regime of Indirect tax provides very cumbersome tax environment due to tax cascading, multiplicity of taxes etc. The proposed regime i.e. GST, would subsume various Indirect taxes and hence it is expected to have simpler tax regime.

There has been significant progress on the GST front recently. The draft model law, rules and forms (relating to payments, registration and Invoices) are available in public domain and government is expected to meet its commitment to bring GST by April 1, 2017.

In general GST would have impact on pricing, working capital, contract with vendors and customers, ERP systems, processes, accounting etc. Hence, GST would impact every aspect of the business.

IMPACT OF GST ON WORKS CONTRACTORS:

LESSER LITIGATION

Works contract is always an area for litigation on different matters such as valuation, classification etc. GST since subsuming multiple taxes in to it would probably reduce litigation in this area.

DUAL TAXATION WOULD BE HISTORY

Article 366 (29A) (b) enable to state government(s) to tax goods portion involved in the execution of works contract. Further, service portion of works contract is declared service under section 66E of Finance Act 1994.

Under GST, in terms of Schedule II of draft model law works contract including transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; is a service

TDS ON WORKS CONTRACT TRANSACTION UNDER VAT

States laws generally include provision of TDS under capture every works contract transaction. No such specific provision would be there for works contract. However, section -37 of draft model law need to be taken care of.

Further to avoid double TDS section 162E of draft model law also taken care of.

RATE UNDER GST

Rate of GST would be key for any Industry to analyze the true impact on its business. However, from rate perceptive as Madhukar sir mentioned above GST certainly would bring benefit for the works contractor.

These are some of the general points and specific analyses can be done only after analysing the business as a whole.

Madhukar N Hiregange (Chartered Accountant) (38934 Points)
Replied 07 October 2016

It is understood that as works contract would be considered as service and composition scheme is expected to be restricted only to traders, works contractors would only get the benefit of 20 lakhs threshold limit subject to conditions.

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