As per the conditions, an entity in which the government stake is above 90% is liable to pay 12% GST for work contracts executed on behalf of the Central government, state government or any local authority.
The definition of a ‘government entity’ under the goods and services tax (GST) regime is proving to be an impediment for stock market listing of companies such as Rail Vikas Nigam (RVNL) and could also hit similar plans of a clutch of other entities such as the National Highways Authority of India (NHAI), which executes construction works awarded by the government.
As per the conditions, an entity in which the government stake is above 90% is liable to pay 12% GST for work contracts executed on behalf of the Central government, state government or any local authority. However, if the government holding goes below 90%, the applicable GST rate is 18%.
So, in the case of RVNL, a company which executes only Indian Railway contracts, while 10% equity shares will be offered to the public under its proposed IPO. An additional around 0.5% will be offered to employees, as has been done in the case of another railway PSU Ircon International, effectively bringing the government holding in the firm to less than 90%.
So, when RVNL gets listed, since it raises bills to the railways, the cash-starved transporter’s cost of projects will go up by 6 percentage points. This will add to the operational cost of the railways which reported its worst operating ratio since 2000-2001 last fiscal at 98.5.
According to sources, even if no shares are offered to employees and the government holding is kept at 90% for now, the percentage of public holding has to be increased to 25% within three years once a company is listed, as per the Securities and Exchange Board of India (Sebi) norms, eventually increasing the cost of projects.
“The ministry of railways has written to DIPAM (department of investment and public asset management) to request the finance ministry to sort the issue,” a source said.
DIPAM, part of the finance ministry, oversees the disinvestment process of government PSUs.
While railway arms RITES and Ircon have already been listed during the current financial year, plans to list RVNL and Indian Railway Finance Corporation (IRFC) are in limbo. “RVNL and IRFC were scheduled for the third quarter (of the current financial year), but they may get listed as of now,” said the source.
In case of IRFC, while the corporate ministry has given a clearance that all future deferred tax liabilities starting 2018-19 will be counted in the company’s net worth, there is still no decision on the backlog of around Rs 6,000 crore of deferred tax liability already in its books.
The government’s disinvestment target for FY19 is Rs 80,000 crore, but mid-way through the year, it is woefully short of the target and has managed a meagre Rs 10,000 crore.
Deferred tax liability is kept aside for payment of future tax liability. So, though a company has money, it cannot be shown in its net worth. It affects IRFC as its borrowing capacity is assumed to be 10 times its net worth, a deferred tax liability impedes its borrowing capacity.
“The above-mentioned GST rule will not affect the company as it will pass on the applicable tax to the contract owner. So, while the government will be the ultimate beneficiary, the railways will be affected as it manages its own finances. And since RVNL is 100% dependent on railway work contracts, the transporter may think of contracting other government entities in order to save cost,” the source said, adding that companies which will be hit most by the rule will be those which only execute government work contracts.