"Handling GST Non-compliance in Competitive Construction Contracts

We have clients who are service providers engaged in works contracts (involving supply of materials, labor, or both) for residential construction projects. They receive payments based on the percentage of completion method.

The issue we're facing is that while the service recipients (customers) pay the consideration for the work, they are reluctant to pay the applicable GST. As a result, our clients have rendered services but have not collected the GST.

Our clients explain that they operate in a highly competitive environment. If they insist that customers pay the GST, these customers claim they can find other providers who will work without charging GST, and consequently, they may take their business elsewhere.

This situation has become perplexing for both us and our clients. We're seeking advice on how to handle this predicament while ensuring compliance with tax regulations and maintaining our clients' competitiveness in the market.

What would you recommend as the best course of action in this scenario?

This is a common issue in competitive markets where GST compliance clashes with practical business realities. Here’s a structured approach to addressing this while ensuring compliance and maintaining competitiveness:

1. Legal Position: GST Liability

Under Section 9 of the CGST Act, 2017, the supplier of services (your clients) is responsible for collecting and remitting GST to the government, irrespective of whether the customer pays the GST.
Failure to remit GST, even if not collected, could lead to penalties, interest, and legal consequences for your clients.

2. Practical Recommendations for Compliance and Competitiveness

a. Build GST into the Quoted Price

Instead of separately quoting the GST amount, your clients can offer an all-inclusive price (e.g., "₹1,18,000 inclusive of GST") to avoid resistance from customers.
Customers may not perceive the GST as an additional burden if it is not separately highlighted.

b. Educate Customers

Emphasize the input tax credit (ITC) benefit to customers registered under GST, who can claim ITC on the GST paid. For B2B transactions, this can offset the GST cost.
Highlight that non-compliance (e.g., working without charging GST) may attract scrutiny or penalties for customers in the long run.

c. Contracts and Agreements

Include a clause in agreements clearly stating that the price includes GST or that GST is payable separately by the recipient. This protects your client’s position in case of disputes.

d. Adjust Pricing Strategy

In highly competitive environments, consider marginally reducing the base price to offset the GST impact without eroding the overall profitability.

e. Payment Collection Strategy

Implement milestone-based invoicing and clearly specify the GST component in each milestone.
Collect GST upfront or in installments along with progress payments to avoid cash flow issues.

3. Addressing Non-Compliance Risks

Do Not Absorb GST Entirely: Absorbing GST by treating it as part of your client's cost (without invoicing GST separately) could result in:
- Reduced profit margins.
- Legal consequences if detected during audits, as tax authorities may demand GST payment with penalties.
Document Efforts to Collect GST: Maintain records of attempts to collect GST from customers to demonstrate intent to comply in case of scrutiny.

4. Alternative Measures

Volume-Based Pricing: Offer competitive all-inclusive prices for larger projects to make the GST more palatable to customers.
Reverse Charge Mechanism (RCM): Confirm whether the work falls under reverse charge provisions. If so, the recipient would be responsible for paying the GST.
Seek Professional Mediation: Engage a tax consultant to negotiate with customers and explain the legal necessity of paying GST.

5. Long-Term Strategies

Awareness Campaign: Conduct small workshops or issue newsletters to customers explaining the importance of GST compliance and its benefits (e.g., ITC).
Engage in Industry Advocacy: Collaborate with other providers to create a unified front, discouraging non-compliant practices like GST evasion in the industry.

6. Conclusion

Your clients must remain GST-compliant while adopting customer-friendly strategies to mitigate resistance. Pricing inclusively, educating customers, and documenting efforts will help balance compliance with competitiveness. For chronic defaulters, your clients may need to evaluate whether retaining such customers is worth the legal and financial risks.