TRANSITION OF LONG TERM CONTRACTS UNDER GST

[Dr. Sanjiv Agarwal]

As India migrates to Goods and Services Tax (GST) in near future, as it is likely to, the economy will also move from a closed, multi-tax, non-efficient and non transparent indirect tax regime to a common GST regime which will be more productive, efficient, business friendly and transparent tax regime. All transitions are painful but then, they say, there is no gain without pain.

To migrate from present indirect tax regime to GST regime, a major transition will take place – be it in economy, business, taxation or management front. Over-night, business entities will be made to comply with new tax law which may not be an easy exercise. It becomes a more complex one as multiple taxes will transit to one tax which requires both-transition or migration as well as merger of more than two taxes (18 State and Central taxes get subsumed into one GST which has three components viz, CGS, SGST and IGST).

The following issues can be identified in transition to GST that would arise when a continuing business or a business on a going concern basis migrates to new tax regime of GST –

1. What happens to existing contracts involving continuous supply of goods and / or services 
2. Applicability of reverse charge mechanism for discharge of tax liability
3. Availment of abatements
4. Availment of exemptions
5. Issues of cenvat credit availment
6. Issues of cenvat credit in case of goods in transit
7. Centralized registration viz-a-vis distribution of credit
8. Possibility of input credit of closing stock in case of CST which migrates to IGST
9. Change of accounting and revenue recognition and so on

Transition Provisions

Transitional provisions in relation to CGST / SGST are contained in section 139 to 142 of the CGST law. These are in relation to the following–

139.    Migration of existing taxpayers to GST

140.    Transitional arrangements for input tax credit

141.    Transitional provisions relating to job work

142.    Miscellaneous transitional provisions

Long term contracts

In case of job works, work contacts, long term or turnkey projects which are carried out over a period of time (not just short term or within a year), there will be transition issues as such projects or contracts will span over both tax regimes, i.e., present tax regime and proposed GST regime.

Such contracts could be for the purpose of –

1. Commercial or residential construction contracts
2. Erection, commissioning or installation
3. EPC contracts
4. Turnkey projects
5. Management,  maintenance and repairs
6. Continuous supply of goods and / or services on ongoing basis

In all the above examples, wrong term contracts of works contracts / construction etc shall be subject to relevant transition provisions.

Transitional provisions specifically in respect of long term construction or works contracts provides for treatment of long term construction contracts or works contracts. In respect of any supply of goods and/or services made in respect of the contracts entered before the appointed day will be dealt with as follows:

If-

1. Long terms construction or works contracts entered before the appointed day, and
2. Supplies of goods and/or services made for these contracts after the appointed day such supplies will be liable to tax under GST.

The same provision would apply to CGST and SGST.

Thus, where a contract continues beyond the appointed day in the GST regime, it would be taxed as follows:

1. for the goods and / or services supplied prior to appointed day, as per present tax laws
2. for the goods and /or services supplied on or after the appointed day, as per GST law, i.e. CSGST and SGST or IGST, as the case may be.

Such contracts will therefore, be subject to taxes under both regimes. Time of supply and place of supply shall be governed by the GST laws.

In case of progressive or periodic supply of goods or services, section 187 of revised model GST law would apply. 

In respect of progressive supply of goods and/or services, wherein tax is charged on happening of either the supply or payment whichever is first, any supply of goods and/or services made in respect of these contracts on or after the appointed day will be dealt with as follows-

1. In case consideration, whether in full or part, for  such supply of goods and/or services was received before the appointed day, and
2. Tax or duty thereon was paid on receipt of such consideration as per earlier law,

no tax would be payable under GST in respect of supply of such goods and/or services.

In case of CGST, consideration can be received in full or in part(s). In case of SGST, there is no condition for receipt of consideration (full or in part) before the appointed day. If supply is made before the appointed day and duty or tax payable thereon has been paid under earlier law, no tax will be payable under GST.

Suggestions

For long term contracts, it would be desirable to review the existing contracts which may continue in GST regime for the following purposes –

1. Ascertaining mutual obligations / responsibilities
2. Ascertaining nature of services or goods (most of the services)
3. Proper documentation by both parties and due diligence
4. Timing of supply
5. Place of supply of goods / services abatements
6. Billing cycle
7. Invoicing
8. Reverse charge, if applicable
9. Documentation for input tax credit

It is advisable that taxpayers should review the existing contracts for determining the tax liability, compliances and mutual obligations  in the GST regime so that transition is smooth.

Discussions to this article

[Ganeshan Kalyani]

Nice article Sir.