India is on behest of implementing Goods and Service Tax (GST) which is said to be biggest tax reform since Independence.
One important aspect under GST would be to deal with transitional provisions especially in relation to ongoing contracts which have been entered into pre GST but not completed at the time of GST introduction. Present discussion is confined to transitional challenges on the contracts entered into by service providers only.
The conditions in contract and their legal enforcement is a subject matter of civil law. However, under the concepts of ‘consensus ad idem’ or ‘offer and acceptance’ it is better that the parties to the contract consider and factor the future GST in the contracts. If consciously and knowingly one enters into a contract in pre-GST period, then when GST is introduced, there would be no question of additional tax being paid in an inclusive contract. In case, GST is not considered, then the additional cost of tax could be a subject matter of demand from the receiver of goods or services. Here it may be kept in mind that the buyer may be eligible for the credit unless he is a final consumer.
1. All inclusive contracts with government: Government generally enter into all inclusive contracts where the price quoted is inclusive of all taxes. The service provider may or may not be required to disclose the value of tax charged separately on the invoices. It could be possible that the part of the contract is unfinished at the time of introduction of GST. The rate of tax under GST is expected to be substantially higher (may be upto 6-10%) than the existing rate of tax. In many of the contract, the profit margin of service provider could be very lower. If the size of contract is big where majority of work pending to be completed at the time of GST, it could be unviable for service provider to execute the work in the initially quoted rates and in some cases could endanger the very survival of the entity.
Apart from this, there could be exemption under existing service tax law on services provided to government say construction of road, canal, dam or other irrigation works etc. These contracts are of significant value and include the value of both material as well as services. It is very unlikely that theexemption will be continued in the GST regime on these type of contracts and if charged to standard rate of tax say 22%, you can think of what would happen to service provider. None of such infrastructural projects have that much margin.Following could be few suggestions which could safeguard interest of service provider:
i. It must be clearly mentioned in the contract that the tax imposed under GST would be charged and recovered separately.
ii.Proper records must be maintained evidencing the extent of work completed before introduction of GST.
iii. The point of taxation under GST regime is also expected to be based on completion of 2 out of 3 events (completion of service, raising of invoice and receipt of advance), invoice must be issued before GST becoming effective to the extent of work completed by then.
iv. Seamless credit is expected to be allowed under GST across goods and services. Proper documentary evidence must be maintained indicating all taxes (excise, VAT, SAD etc.) for the material lying in the stock pre GST and to be used after GST. This could enable the service provider to take the credit of taxes paid under current regime.
v. Stock declaration statement must be filed with revenue authorities indicating the goods lying in the stock and tax paid thereon.
vi. Proper planning must be done for procurement of material immediately preceding introduction of GST. This is important as there could be certain restrictions on availment of credit depending upon the holding period of existing stock.
vii. In case of interstate contract where material is required to be moved from one state to another, it must get transferred to the state where it is expected to be incorporated in the service to avoid levy of additional 1% tax.
viii. Proper reconciliation must be prepared for revenue arising from these contracts booked in profit & Loss A/c viz a vizshown inST-3 returns.
2. Contract for services presently exempted/abated/covered by negative list: Service provider may presently be engaged in providing services which are covered by exemption notification or by negative list. Most of the exemptions presently granted are expected to be phased out in the GST regime. This could make the service provider to expose with the indirect taxation system for the first time in the GST regime. These service providers are most likely to hit as the tax rate presently from zero is expected to be in the range of 20-24%, directly affecting the cost especially in cases of B2C cases where end consumer may not be eligible to take the set off of tax charged by service provider. In case of ongoing contracts expected to overlap in GST regime, following could be guiding factors for such service providers:
i. The contract must explicitly spell out that tax would be charged extra, as applicable including GST.
ii. Invoice should be raised and payment received from the customer for services to be provided in post GST regime, so that no tax is applicable to that extent as 2 out of 3 events are fulfilled beforehand.
iii. Inventory of material/capital goods, their location, taxes paid thereon must be documented and declared to claim the credit of taxes paid on purchase as the tax would be charged on the services provided post GST which can be offset against tax paid on such goods.
3. Service export: Service provider may be providing services which are covered byexport of service in terms of present rule 6A of Service Tax Rules, 1994. The place of supply rules under GST regime though expected to be on the existing lines of Place of provision of Service Rules yet it could be possible that certain changes are made which may make the transaction ineligible for export. This could directly affect the service exporters as the service receiver located abroad may not be concerned with the changes of tax structure in India and may straightforward deny for reimbursing additional tax cost especially where tax clause is not mentioned in the contract. The exporter of service could take following actions to safeguard against possible consequences of imposition of tax:
i. All existing and running contracts must be relooked to examine the tax clause. If not mentioned, modify existing agreement or enter into supplement agreement to provide for GST in case transaction ceases to be export of service.
ii. Refund claim must be filed for all credit accumulated till the time GST is introduced especially in cases where it could be possible that the services presently covered under export of services could be taxed as per revised place of supply rules.
iii. Clear demarcation should be established as regards to services rendered but not billed as on the date of GST introduction. Suggested to raise invoices for all completed services before GST becoming effective so that taxability of the same is not in doubt especially where there is change in place of supply rules.
4. Works Contract:Thetaxation of works contract under current taxation regime is most complicated as it may involve the element of excise, VAT/CST and service tax on different components of single transaction. The tax is levied under current regime on different taxable event i.e. manufacture, sale and provision of service. However, under GST regime, all these taxable events are likely to be merged and there will be only single taxable event i.e. supply of goods/supply of service. The works contract involves both material and labour portions and consequently the question could arise whether the same should be treated as supply of goods or supply of service? This could make difference due to the fact there could be separate SGST rate for goods and service, different place of supply rule, imposition of additional tax @1% during initial 2 years period etc. Internationally accepted practice in few countries is to treat all composite supply to be considered as supply of service notwithstanding it involves material portion also.This obviate need to segregate the consideration towards goods and services. It is not certain as of now what would be supply principle of works contract, yet following aspects could assist a service providerengaged inongoing works contract during transition to GST.
i. Specify all components of tax i.e. VAT, service tax clear in the agreement/work order so that additional cost arising under GST do not eat into the margin of service provider.
ii. It could be possible that existing contracts are exempted which may be brought under tax net in GST regime. In order to avail the exemption benefit extended during pre GST regime, proper documentary records must be mentioned clearly mentioning the stage of completion of contract. Certificate from chartered engineer as to stage of completion could also be obtained especially in case of large contracts.
iii. Availment of credit on inputs is restricted under existing provisions which is not likely to be in GST regime. All materials supplied in GST period would be available as credit. Hence, inventory of all stocks lying as on the date of GST along with supporting tax paid documents must be maintained so that credit of same may be claimed once GST is introduced (subject to provision under GST law).
iv. All purchases should be made from registered dealers clearly showing duty of excise and VAT so that the credit of same could be claimed under GST regime to the extent material to be incorporated in works contract post GST.
The paper writers have tried to analyse certain aspects which could be relevant for a service providers engaged in providing services remaining uncompleted at the time of introduction of GST. The above discussion is made based on the experience gained at the time of introduction of VAT. Feedback- email@example.com or firstname.lastname@example.org.
Bibliography- “Goods & Service Tax- A Primer” Published by Wolters Kluwer Tax & Accounting (CCH India)
By CA Madhukar N Hiregange
& CA Ashish Chaudhary