GST in electricity, construction equipment & highways

There is no denying that the goods and services tax (GST) has had a major positive impact on the infrastructure sector. The complexities associated with the plethora of existing indirect tax systems have vanished (customs, excise, value-added tax or VAT, central sales tax, entry tax, cesses, etc) and their cascading effect extinguished. There is seamless flow of credits where earlier many restrictions existed on availing and utilising them; and a single internet-based interface between all modes of the supply chain has given a fillip to transportation and logistics.

This is indeed a transformation of the way the infrastructure sector will build India henceforth.

As these GST processes set in, every sector of infrastructure is affected in its unique way in the new granularities of running the day-to-day business. So be it oil and gas, engineering procurement construction contracts, power, renewables, port, airports et al — a variety of representations would have been received by the finance ministry and the GST Council to smoothen the creases or remove embedded bugs or, in some cases, simply to shift the activity to a lower tax slab. All such decisions would no doubt be taken after careful consideration of the economic objectives to be attained. 

The economic objectives are clear — spurring growth and investment, and creating jobs. While infrastructure is a key sector in meeting these objectives, there are three areas within it that are specially poised to provide immediate outcomes. These are electricity, construction equipment and highways.

Electricity: There is ambiguity and discomfort on electricity being kept outside the purview of the GST. 

Electricity was not taxed earlier under indirect tax as it has always been subject to electricity duty. However, the current context is markedly different in that standing behind the ultimate sale of power to any class of consumers is a vast network of suppliers who are denied the ultimate linkage to “input credit”.

Electricity had been covered in the definition of goods in the central excise (tariff heading 2716) where the rate of tax was nil. Similarly, under VAT law, it had been included in the definition of goods, but exempted from levy of VAT. Power to collect duty on the electricity is vested with state governments under entry number 53 of the State List of VII Schedule, which has not been subsumed in GST. The entry continues to be as such.

Power hurdle: There is ambiguity and discomfort on electricity being kept outside the purview of the goods and services tax. Photo: iSTOCK
Is electricity a “good” or “service” under GST? The definition of goods covers movable property where service is defined as anything other than goods. This poses a question for electricity. Unlike earlier, where there was a specific entry to provide for electricity, it has not been explicitly mentioned anywhere in the GST.

The ideal proposition would have been to subsume the electricity duty within the GST and make it subject to only one GST. However, this could require convincing all the states as electricity duty is one of the major elements of their revenue. One alternative is to include it in the “zero-rated” list, which is currently restricted to exports and where unutilised input credits are provided as a refund. The other option is to impose five per cent GST on generation, transmission and distribution. Charging tax on output would allow power companies to claim input credit on equipment, capital goods, operational expenses and other business expenses, which ultimately would result in lowering the cost of electricity. Anyway, the benefit of reduced cost on account of higher input tax credits would have to be passed on to consumers under the anti-profiteering law and hence the overall cost to the end consumers is not expected to increase. This option is preferred as it aligns the industry to the broader framework. 

Earth-moving and construction equipment: Under the earlier indirect tax regime, earth-moving and construction equipment was levied central excise duty of 12.5 per cent (with cenvat benefits) and five per cent to six per cent VAT. By and large, construction equipment attracted 18 per cent duty across different parts of the country. The move to impose 28 per cent GST has been perceived to be a setback for the industry, on account of the expected price increase of 8-10 per cent even after considering increased input credits. This is considered detrimental in several ways to the infrastructure sector as a whole, as it is construction-led.

This higher rate of GST on domestically manufactured equipment has also to be seen in the context of making imported equipment more competitive. The global construction equipment industry is facing headwinds and the increased prices of domestic equipment will make the Indian market more attractive to imports. Moreover, most capital goods are now in the 18 per cent GST bracket. But, earth-moving and construction equipment (which are also capital goods) is being seen as clubbed with automobiles at 28 per cent. 

The recommendation is to put this category in the 18 per cent slab.

Road and highway construction: In the pre-GST regime, services provided for construction of roads were exempted from service tax. This exemption has been withdrawn and such services have been subjected to GST at the rate of 18 per cent. The same would apply to major and minor maintenance contracts. With exemption continuing in toll collection activities, concessionaires would be unable to claim the credit of taxes charged by suppliers. 

The GST Council at its meeting dated August 5, 2017, has considered the suggestions placed before it to reduce the rate of tax on infrastructure sector to 12 per cent. But the benefit of reduced rate is being given only when the services are provided to the government. This leads to an undesirable market distortion between private and public sector for similar projects.

The suggestion is to bunch all these activities connected with highway construction, operations and maintenance to the five per cent slab and remove the distinction between government and non-government projects.

It is expected that the impact of the suggestions in these three areas would be, overall, not tax-revenue detrimental and would provide a much-needed fillip to growth and investment in general. The author is chairman, Feedback Infra.; Twitter: @Infra_VinayakCh

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