The infrastructure sector is of national importance and a barometer for the growth of the economy. The infrastructure projects are often given a fillip by a host of concessions and exemptions on the goods and services. It has the railways, road, port, power and mining industry under its ambit. These industries are huge in themselves and the indirect tax applications are different and unique for each of them. The multiplicity of the taxes applicable on the infrastructure further complicates the indirect tax regime for the sector.
It appears that the infrastructure supply chain is being evaluated very closely under the GST bill. The bill proposes to widen the tax base with a reduction in the exemptions. Thus the major concern for the infrastructure sector is the discontinuation of the current exemptions and concessions in the GST rollout. The impact on the credit chains and costing also needs to be understood.
Coming to the industry specifics, the railway and port industry enjoys service tax exemption on construction, erection and commissioning services. Similar is the case of road construction services, but VAT is applicable on the material used for construction. If you travel by rail the services are partially taxable, but full applicability comes into play for port services. If you look at the mining sector, you will find that VAT is applicable, however most mining products are free from excise duty. With such a wide variation in indirect taxation prevalent the industry it remains to be seen how it will pan out in the GST regime.
There are already some talks on keeping the power sector out of the GST bill. This is again to provide a leeway to states, so that they can continue to earn from the electricity duty levied by them on the users. This has a direct bearing and impact on the power plants. They are unable to avail the input tax credit on taxes paid on coal and also on capital expenditure for setting up the power plants. This leads to an increase in the production costs of the power plants. If GST is applied on the inputs at a rate of 25% for the power plants, against the existing CST of 2% and service tax of 14%, with no relief on the sale side, it will kill the profitability and ultimately the viability of the power plants.
In the civil construction there is no input tax credit available against the payment of CENVAT and state VAT in the infrastructure projects. How the input credit on paid taxes gets transformed under the GST for the civil construction industry also remains to be analysed.
The on-going long term projects need to keep a watch on the sweeping changes likely to be applicable under the GST. They government may decide to exempt them from the GST and continue the old taxation, but it is highly unlikely. The preparation and re-calibration for the tax reforms that become applicable on the infrastructure industry assumes significant importance under these circumstances. The sector must pick up the strings right away if they want to get over this daunting task.