Clarity needed on application of GST to infra      

In the recently released White Paper on Goods and Services Tax (GST), the Empowered Committee of State Finance Ministers has provided a sketch of what lies ahead. However, it contains at best the tip of the iceberg.

It is nobody's case that GST is undesirable, or that GST will not simplify the tax process. What begs attention, however, is the timeline for introduction of this very important piece of tax reform. The white paper fails to address this and the April 1, 2010 deadline could well elude us.

At this stage, one is reminded of one of the key canons of taxation, i.e. 'certainty of taxes'. This principle applies to tax laws in force and should equally apply to new laws that can potentially cause a paradigm shift in the taxing philosophy.

It is hard to conceive moving into the future without any clarity on the tax regime, especially in the case of long-term infrastructure contracts.

The plight of the contactors and developers in budgeting/ planning/ pricing/ costing their bids and projects, where contracts are to be issued today, is just overwhelming. One has no line of sight on how to plan these long-term construction contracts.

To say that these long-term contracts would have necessary protection of the 'change of tax law' to deal with the issue is certainly not good enough. This is essentially because GST is not just a change of tax rate, but a change of the entire tax regime. As and when either the developers or the contractors attempt at triggering the change of tax law clauses of their contract/ subcontracts, they would struggle perilously --- as the impact of GST would not be restricted on the transaction qua them, instead would have deep-rooted impact on every player in the entire supply chain, leading to unquantifiable changes in the overall cost structure.

Another important issue that requires close attention is the concept of 'zero rating'. Internationally, the rate of tax inter alia on exports as well as construction of building is zero, where as banking/ education services are exempt from VAT. This essentially means, where the rate of tax is zero, the taxpayer can claim refund of all input taxes, whereas in cases where the tax is exempt, no such refund of input taxes are available.

However, the white paper suggests that the concept of zero rating would be applicable to exports and supplies to SEZ. However, no such reference has been made to large infrastructure projects such as building construction, power projects, roads, ports, dams, bridges, etc.

Considering the fact that in the GST regime, exemptions would be few and far between (as it distorts the credit chain), how does the empowered committee contemplate to pass on tax incentives to this sector (as is the case currently, e.g. excise duty exemption to supplies under ICB), if they were not to zero-rate this Sector. Failure to zero-rate them could mean, while all other business would reap the benefits of GST, the positive effect of GST would be elusive for the infrastructure sector. May be, in comparison to the current tax cost, there could be incremental tax cost tomorrow (owning to potential withdrawal of existing tax exemptions under the GST) for this sector.

Therefore, perhaps, there is a case for the empowered committee to take cognisance of this anomaly and tweak the design of the GST to benefit this important sector of a growing India by broad-basing the concept of zero rating to construction of power, roads, dams, etc. If this cannot be achieved, then at least (a) they could consider removing electricity from the list of exempt items (as is the case currently) and insert it into the zero-rated list, or (b) subsume electricity duty into the GST framework, both of which would lead to the desired effect for the power generators -- i.e. recoverability of input taxes, which are otherwise a cost currently.