The Indian Railways is worried that the tax treatment of work contracts in the goods and services tax (GST) regime would inflate its cost of expansion, as the contractors threaten the additional tax liability on them will reflect in contract values. With the transporter’s output tax liability limited — it pays service tax on passenger fares of about Rs5,000 crore annually —, it hasn’t got sufficient avenues for set-off of input taxes. The tax rate for work contracts in the GST regime will be 18%, compared with an effective rate of 4% (state VAT) now. However, tax experts feel the contractor’s claim that GST would increase the tax incidence on them is exaggerated. The taxes on whatever goods and services procured by the contractors will be fully creditable in the GST regime, while currently this facility is not available to them, they noted. “All savings (because of input tax credit) will be at the hands of the contractors.
Although the headline rate has increased, the net tax incidence on them might not necessarily increase, it might even come down,” said Amit Bhagat, partner, PwC India. Railway work contracts are now exempt from service tax, unlike in case of construction work contracts (which involves transfer of land as well), where a 6% service tax (after a 60% abatement), states impose a value-added tax of 1-4.5%. Work contracts form a substantial part of the railways’ cost as most of its expansion/modenisation projects such as laying of tracks, doubling, among others, are executed through tendered contracts. The extent of work contract component, however, varies from project to project. According to a railway official who requested anonymity, around 30% of the cost of laying a new line would be made up of work contracts and it will be 60% in case of repair works.
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According to another railway official, cost of laying a new track comes to around Rs10 crore per km. During FY16-17, the Indian Railways commissioned—including new, gauge conversion and doubling — 2,855 km of lines. “We are working on so many tracks. However, the total tax outflow, which can only be assessed after rates and exemptions are finalised, are expected to go up for the railways. It will also depend on how much contractors pass on the (ITC) benefits to the railways,” said the first official quoted above, adding that the ministry has been writing letters to the finance ministry for tax reliefs.
Apart from work contracts, the railways was also concerned about the prospect of its own material movement and coach repairing works attracting integrated GST on inter-state transfers. Though the GST Council on its June 11 meeting exempted repair works, the transporter’s own material movement will still attract integrated GST which it may not be able to offset. “We are still trying to get exemption for depot to depot transfers,” said the first official. However, the exemption seems unlikely to come by July 1, the date of roll out of GST. “I am sure some reviews will be done by the government post the roll out,” added the official.