View of EFFECT OF GST (GOODS AND SERVICE TAX) ON CONSTRUCTION SECTOR CONCEPTUAL NOTE

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Vol.04,Special Issue 02, 13 Conference (ICOSD) February 2019, Available Online: www.ajeee.co.in/index.php/AJEEE

EFFECT OF GST (GOODS AND SERVICE TAX) ON CONSTRUCTION SECTOR CONCEPTUAL NOTE

Himangini Sharma

Research scholar, Department of Management Studies, University of Kota, KOTA Abstract - The Government of India has taken a major economic decision of introducing GST (Goods and Service Tax) in India. This is the indirect tax on the sale of goods and services. The tax came into effect by the Modi government from July 1, 2017 through the implementation of One Hundred and First Amendment of the Constitution of India . The Goods and Services Tax Council governs tax rates, rules and regulations which comprises finance ministers of centre and all the states. Construction and real estate has been a booming sector in developing country like India, due to first demonetization and now GST these sectors are facing a slowdown and a cascading effect.

Key words: Indirect tax, GST (Goods and Service Tax), unorganized, labour, construction sector.

1. INTRODUCTION

GST is one of the widely accepted indirect taxation system prevalent in more than 160 countries across the globe. Globally, GST has been structured as a destination bases tax on consumption of goods and services within a country. It is proposed to be levied at all stages right from manufacturing up to final consumption with credit of taxes paid at previous stages available as setoff. In a nutshell, only value addition will be taxed and burden of tax is to be borne by the final consumer.

France was the first country to implement GST in the year 1954. Within 62 years of its advent, about 160 countries across the world have adopted GST because this tax has the capacity to raise revenue in the most transparent and neutral manner. GST is a consumption based tax, based on VAT Principle i.e tax will be in the state in which goods and services or both are finally consumed.

Exports are not taxable; because the place of consumption is outside India imports are taxable because the place of consumption is in India.

An indirect tax (such as sales tax, per unit tax, value added tax (VAT), or goods and services tax (GST)) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer)

Features of indirect tax are :-

1) Important source of revenue 2) Tax on commodity and services 3) Shifting of burden

4) No perception of direct pinch 5) Inflationary

6) Wider tax base

7) Promotes social welfare 8) Regressive in nature

To understand GST lets take a brief idea about the channels of distribution.

In order to supply goods from one place to another a systematic chain or flow of goods is need to be followed, as the goods are produced at one place but the customers are scattered over a wide geographical area. Thus, it is very difficult for a producer to distribute his products all over the country. Therefore, he takes the help of some intermediaries to distribute his goods. Philips Kotler defines channel of distribution as ―a set of independent organisations involved in the process of making a product or service available for use or consumption‖. There are different functions of channel of distribution like sorting , allocating , advertising , promotions etc. There are mainly two types of channel of distribution first is Direct channel of distribution second is Indirect channel of distribution.

In direct channel of distribution the producer or the manufacturer sells the good directly to the customer there is no role of intermediaries in this distribution channel. It is also known as the zero level channel.

Manufacturer——→Customer

In case of Indirect channel of distribution there are 3 types : one level channel , two level channel and three level channel in these level of channel intermediaries play a major role , they help the goods to flow from one place to another according to the demand of

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customers and other characteristics of product, region etc.

These channels of distribution can be seen as below

Manufacturer ————→ Retailer———

→Customer (One level channel )

Manufacturer ———→Wholesaler———

→Retailer ———→Customer (Two level channel )

Manufacturer ——→Agent ——

→Wholesaler——→Retailer ——

→Customer (Three level channel)

These channels of distribution play a very important role in the revenue generation to the government in the form of taxes. In a easy form GST and its before and after effect can be understood by this simple example –

Tax system in India prior to GST

Manufacturers Wholesalers Retailers

PARTICULARS AMOUNT PARTICULARS AMOUNT PARTICULARS AMOUNT

COST 50 COST (100+10) 110 COST (209+11) 220

PROFIT 50 PROFIT 90 90 PROFIT 80 80

SALE PRICE 100 SALE PRICE

(190+10) 200 SALE PRICE

(289+11) 300

TAX @ 10 % 10 TAX @10%

(19+1) 20 TAX @10%

(28.9+1.1) 30 INVOICE

PRICE 110 INVOICE

PRICE (209+11)

220 INVOICE

PRICE (317.9+12.1)

330 (Cost to consumer)

So here in this above table the revenue generated to the government is –By manufacturers – Rs. 10 By wholesalers –Rs. 20 By retailers –Rs. 30

Total – Rs.50

So here in this above table the revenue generated to the dealers are By manufacturers – Rs. 50, By wholesalers –Rs. 90, By retailers –Rs. 80

Total – Rs. 220 Tax system in India with ITC

Manufacturers Wholesalers Retailers

PARTICULARS AMOUNT PARTICULARS AMOUNT PARTICULARS AMOUNT

COST 50 COST(110-10) 100 COST(209-19) 190

PROFIT 50 PROFIT 90 PROFIT 80

SALE PRICE 100 SALE PRICE 190 SALE PRICE 270

TAX @ 10 % 10 TAX @ 10 % 19 TAX @ 10 % 27

INVOICE

PRICE 110 INVOICE

PRICE 209 INVOICE

PRICE 297 (Cost

to

consumer) So here in this above table the revenue

generated to the government is –By manufacturers –Rs. 10 By

wholesalers (19-10) Rs. 09 By retailers (27-19) Rs. 08 Total – Rs. 27

So here in this above table the revenue generated to the dealers are By manufacturers – Rs. 50, By

wholesalers –Rs. 90 By retailers – Rs. 80 Total – Rs. 220

So by looking at this table it can be concluded that the revenue to the government decreased but the profit to the suppliers remains the same, here it can be seen that the government is trying to show that they want to put less amount in their pockets and wants the maximum benefit of the suppliers and the ultimate consumers. (I.e. The cost of the product came down from Rs. 330 to Rs.

297 )

The above example states that the adoption of GST will benefit the customer and the dealers.

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2. CONSTRUCTION SECTOR

Construction is the process of constructing a building or infrastructure.

Construction is a general term meaning the art and science to form objects, systems, or organizations, and comes from Latin constructionem (from com- "together"and struere "to pile up") and Old French construction.^[5] Construction is used as a verb: the act of building, and a noun: how a building was built, the nature of its structure.

The construction sector accounts for second highest inflow of FDI after the services sector and employs more than 35 Million people.

In general, there are three sectors of construction: buildings, infrastructure and industrial.

Building construction is usually further divided into residential and non- residential (commercial/institutional).

Infrastructure is often called heavy civil or heavy engineering that includes large public works, dams, bridges, highways, railways, water or wastewater and utility distribution. 50% of the demand for construction activity in India comes from the infrastructure sector; the rest comes from industrial activities, residential and commercial development etc.

Industrial construction includes refineries, process chemical, power generation, mills and manufacturing plants. There are also other ways to break the industry into sectors or markets.

Construction Industry is one of the most booming industries in the whole world. This industry is mainly an urban based one which is concerned with preparation as well as construction of real estate properties. The repairing of any existing building or making certain alterations in the same also comes under Construction Industry.

In construction industry most of the people are unorganized, they are the one who can be defined as that part of the work force that have not been able to organize itself in pursuit of a common objective because of certain constraints such as casual nature of employment, ignorance or illiteracy, superior strength of the employer singly or in combination etc. They are mostly seasonal in nature or work on daily bases

2.1 Importance of construction sector 1. It helps in the economic

development of the country.

2. It is a biggest source of generating employment in country after IT , specially for the local population, and lead to their social upliftment.

As small contractors undertake most of the projects in the rural areas and the settlements on the fringes of the large conurbations, they serve as an important vehicle for the socio-economic development of these areas.

3. UNORGANIZED SECTOR

The unorganized sector can be defined as that part of the work force that have not been able to organize itself in pursuit of a common objective because of certain constraints such as casual nature of employment, ignorance or illiteracy, superior strength of the employer singly or in combination etc.

Now if we talk about unorganized labours then a large number of unorganized labour are found in the small enterprises. The Government of India MSME (Micro Small Medium Enterprise) Annual Report (2015-16) states that MSMEs employ an estimated 1,171.32 lakh persons and contribute around 37%

of GDP. Small business are the backbone of the Indian economy. There are three types of small business or we can say that small enterprises are categorized in three parts – micro enterprises, small enterprises and medium enterprises.

These, collectively called the MSME sector 3.1 Growing prominence of unorganized sector in India

Predominance of informal employment has been one of the central features of the labour market scenario in India. While the sector contributes around half of the GDP of the county, its dominance in the employment front is such that more than 90% of the total workforce has been engaged in the informal economy. As per the latest estimation of a Sub-committee of the National Commission for Enterprises in the Unorganized Sector (NCEUS), the contribution of unorganized sector to GDP is about 50% (NCEUS 2008).

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4. GST EFFECT ON UNORGANIZED SECTOR

1. Small vendors that make up the unorganized sector have no means to even register for GST (For eg., you need a digital signature just to sign up for GST!) That means when they SELL something, a larger company will NOT buy. Why? Because the seller does not have a GST number. So the buyer will not get credit for the GST and will end up paying for the full GST. So no more purchases from small vendors who cannot register for GST.

2. There is complete exemption if turnover is upto 20 lakhs and partial exemption if turnover is 100 lakhs, so it can be said that the companies or enterprises whose aggregate turnover exceeds 20 lakhs in a year are liable to be registered under GST and those whose turnover exceeds 20 lakhs can opet composition scheme.

The composition scheme enables small taxpayers to: File a single quarterly return in place of multiple monthly returns. To opt for composition scheme a taxpayer has to file GST CMP-02 with the government.

This can be done online by logging into the GST Portal. No Input Tax Credit can be claimed by a dealer opting for composition scheme Taxpayer has to pay tax at normal rates for transactions under Reverse Charge Mechanism. The taxpayer cannot make any inter-state supply of goods.

3. The dealer cannot supply GST exempted goods.

4. For the enterprises whose turnover falls below 20 lakh are not required to be registered under GST but can get voluntary registration on SUO moto bases.

5. Before GST there were different exemption limit for manufacturers under excise (upto 1.5 crore), traders under VAT (upto 5 lakh) and service providers in service tax (upto 10 lakh).

But now after implication of GST there is only one exemption limit of turnover upto 20 lakh for either manufacturer, service provider or traders.

4.1 Some Benefits after Implication of Gst Are

1) After implication there is harmonization of laws, procedures

and rates of tax and it is simpler tax regime with fewer rates and exemptions.

2) It reduces the exemption to manufacturers in MSME sector. And it is treated at par with big businesses.

3) It increases the exemption limit on traders.

4) There is abolition of regional tarrif.

5) This impact of GST on MSME is reduction in the compliance cost as there is no need for multiple record keeping for variety of taxes so there will be lesser requirement on investment of resources and manpower in maintaining records.

4.3 Reviews

Reviews of different Researchers, economists, industrialist, politicians and contractors are as follows regarding implication of GST: Effect /Impact of GST on construction and unorganised sector.

1. Anirudh Rajan, Researcher, Public Finance Public Accountability Collective (PFPAC) GST’s impact on the costs and market share of small and informal units will indirectly affect the wages of those employed by such. Reductions in the average wages or worker strength in the MSME or informal sector will affect the purchasing power of a vast majority of the population causing a crisis of demand. As this happens, big formal businesses, under far less competition than prior to GST, will necessarily capitalize on the situation to drive up profits and eventually prices. The end- consumers of the country, the bulk of the population, will at an average, most likely be left with a lesser income and possibly higher prices.

2. Arun Kumar is a renowned authority on the black economy. The economist taught at the Centre for Economic Studies and Planning at Jawaharlal Nehru University and had also helped former Indian Prime Minister VP Singh draft his election manifesto. He says - The GST impact is superimposed on the impact of demonetisation. It is against the informal sector. The unorganised sector cannot cope with such a complicated tax. One nation, one tax is very good for the large scale industries, but for the small business

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dealings, it is local purchase and local sale. A local dealer at a market in Sikandarpur, for example, is not going to supply his products in Mumbai. So, GST makes limited sense to him The efficiency of the large scale industries will go up because of GST so their price will come down and get them more business. That is not the case with a person who has a small scale business, so his business will be hit.

Now, even if you exempt businesses below Rs 20 lakh under GST, it is still not a favour upon the small businessman. Let us suppose, he is doing a business to business transaction, then he cannot give input credit because he is not under GST.

Therefore the e for the buyer who will stop doing business with small scale businesses person buying from him will have to give reverse charge. So it is doubly expensiv and move to the large scale businesses. Without proper consultation, moves like GST, demonetisation etc. will continue to fail.

3. In an interaction with ET journalists, Dipak Gupta, Kotak Mahindra Bank’s joint managing director GST again falls into three categories — the good, the bad, and the ugly. The organised part is good and they are a little concerned about the processrelated issues. The bad is the intermediate piece which is partly organised and partly unorganised and they are fighting more of the economics, whether the rate should be 28% or 18% or 5%. But the ugly one is the unorganised because the problem part of GST is that if you have anything to do with the chain and you are not organised, then you are in trouble. But if you are organised and you are part of the GST chain, it’s great for the system. Two years down the line, it is going to be very good for the system. So why is the ugly category not wanting to be part of the chain? His problem is less of GST. His problem is more of income tax. If I was not disclosing anything, and suddenly you say be part of the chain, I don’t mind. But I have never shown an income of more than Rs 2 lakh, so, how will I show my real income of a crore of rupees. Members of the unorganized workers joint

action committee, who were on a state – wide yatra in Tamil Nadu , staged a demonstration in front of the collectorate here on Wednesday, pressing a charter of demands to protect the interests and livelihood of about 2 crore workers in the unorganized sector in the state. After launching the yatra in front of Gandhi statue in the marina on October 2 , the committee members, led by KV Thirupathi, president of the hindu mazdoor sabha,and R.Geetha, president of the unorganized workers federation, visited Nagercoil, Thoothukudi and Tirunelveli before arriving here. After a brief demonstration, they presented a memorandum to the collector, urging him to take to the notice of the government , the plight of workers in the unorganized sector, including fisheries,construction, salt industry ,agriculture and weaving in the distict.

Stating that there were more than two crore workers in the unorganized sectors, including agriculture in the state, Ms. Geetha said their livelihood was badly hit and many were rendered jobless after the centre came out with demonetization and introduced the GST tax regime.

4. According to former Indian chief statistician and economist pronab sen says that it is very difficult to measure the transaction taken place between the sectors (unorganized sector and the organized sector ) so its very difficult to figure out the damage cause due to GST. He agrees that GST, much like all other business sectors, has had a significant impact on the unorganised sector, even the government cannot deny that. The question, however, is how bad this impact is and when and how will this sector overcome it. Sen states that one and probably the only way for the unorganised sector to survive in the post-GST economy is to provide the goods/services at a lower price than the tax deducted price offered before GST. ―Today for instance the organised sector is paying 15 per cent tax, then the unorganised sector that doesn’t pay tax, automatically gets 15 per cent price advantage. Now, if they register for GST, that advantage goes

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off. Even if they get input tax credit, the compliance cost would go up.

5. FISME (Federation of Indian Micro and Small & Medium Enterprises)’s secretary-general Anil Bharadwaj further explains the issue. According to him, the transition from the VAT to GST was easier for MSMEs, however, not so much for the small companies and micro enterprises which were not formally recognised before. One positive impact of GST on the organised sector has been in the form of partial formalisation of the MSME companies. ―Now, that they are in the GST net, they can prove that they have basic minimum revenue, which has improved their chances of getting credit from banks. The credit offtake of MSMEs have gone up,‖ says revenue secretary Hasmukh Adhia.

The increase in the number of registered taxpayers in the post-GST era is also an indication of a more formalised economy

6. Rajan Bandelkar, President, NAREDCO West. Said - Builders are hoping that the government will allow input tax credit on under-construction residential properties even after reducing the GST rate to five percent.

―We are quite optimistic about the revision of GST rates on residential properties. However, National Real Estate Development Council (NAREDCO) wishes for an input tax credit, as the absence of the same will lead to a steep rise in price, which will majorly impact the affordable segment, thus directly affecting the central government’s dream of Housing for All by 2022. We are looking forward for a 12 percent tax bracket, with abetment of 50 percent for land cost and other premiums, effectively bringing the tax rate at six percent with input tax credit. We are also expecting a revision on GST as it will largely help in converting the fence-sitters into buyers,‖

7. ―GST reduction is a very good move but the only request is that input tax credit should not be withdrawn. If it is withdrawn, the cost of burden of input tax credit will get passed on to customer, thereby increasing his cost of acquisition. Reducing it to five percent with input tax credit is brilliant. It will be a shot in the arm

for the real estate sector, especially affordable housing. With income tax credit it should come down to five percent, otherwise it should stay at eight percent,‖ said Joyville Shapoorji Housing, Managing Director, Sriram Mahadevan.

8. Revenue secretary Adhia says the government thinks that GST has led to some amount of formalisation of the MSME sector and that has helped them. "Now, that they are in the GST net, they can prove that they have basic minimum revenue, which has improved their chances of getting credit from banks. The credit off take of MSMEs have gone up," he says.

9. This will eventually become an issue when land prices soar, ― said JC Sharma, president of Credai Bengaluru, a real estate industry lobby. ―As much as 98% of products in Bengaluru fall in the price range of Rs 4500 and Rs 7,500 per square feet.

Land costs are an important component, and this is, in fact, a big issue in Mumbai, where they have asked for allowing actual land cost rather than an arbitrary value for calculating GST, ―he said.

10. ―This is a grey area, ―said MA Maniyar, a former deputy commissioner of commercial taxes department. ―The land value varies from one place to another, while the cost of construction would be, by and large, the same. That is something the real estate industry has to explain to the authorities and the GST Council.―

There is also no clarity with regard to the treatment of joint development projects, which is a major issue in Karnataka, he added. A former commissioner said the GST law covering the construction sector could have been made more robust with appropriate amendments to the Constitution which, as of now, empowers only states to tax land and buildings.

11. GST is not applicable on sale of a plot of land or an apartment, according to Sudipta Bhattacharjee, partner at Advaita Legal, a law firm, in Delhi.

―So, a flat under construction is neither a plot of land nor a building, and hence, an effective 12% GST may not pose such a problem, ―he interpreted. Others argue, when a

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developer collects a price, it includes the cost of land, as well. ―I don't see an overlap. Demarcation between where the GST stops and where the stamp duty begins is very clear, he said.

12. SANKAR R Author (Department of commerce, Pondicherry University Community College , Lawspet , Punducherry, India. Explains impact of GST on various factors in which tax rate of cement is ranging in between 18 to 20 % which will result into the benefit to the company and the related companies. Similarly in the real state which is major source of infrastructure development and economic growth of any country and generates the maximum employment after IT will be able to see the growth as prices of the property and cost of construction tends to go down as the single taxation system will be followed which is ITC (Input Tax Credit) all other forms of indirect tax will be removed. Thus a positive impact of GST can be seen.

13. Meet H. Rawal1, Tej J. Patel2, Vikas V. Vishwakarma3, Mr. Arpit Vyas4 1,2,3 BE Final Year Student at Thakur College of Engineering &

Technology, Mumbai, Maharashtra, India, 4Assistant Professor at Thakur College of Engineering & Technology, Mumbai, Maharashtra, India. Has done study and It is based on the comparison for a project constructed with old tax and with new tax system.

They concluded though ITC is not taken in consideration, there has been a considerable reduction of up to 1.2%

of the Project Cost by application of GST. If the ITC studies are taken in consideration, then this cost will reduce even more & hence, it can be said that it is a good effect of GST on construction industry. It is also seen that only the Labour Contracts are at total loss which is to be paid attention by the contractors bidding for labour contract.

4.4 Main Objectives of The Research Work

1. To study the previous research paper and reviews related to GST.

2. To identify the impact of GST adopted in 2017 on construction sector ie unorganized labour.

4.5 Importance of Proposed Research Work

1. The present study is going to highlight the issues which construction sector is facing.

2. It will help to identify the problems faced by construction industry and unorganized labour due to GST.

5 RESEARCH METHODOLOGY

The author identified article and research paper using 4 key words namely: GST, construction sector, Unorganized, labor, improvement in two data bases i.e Google Scholar and shodhganga. This paper is based on secondary data collected from various articles, websites and research papers. The research articles retrieved were manually evaluated for their relevancy to the topic and only the most suitable article has been used in this review.

5.1 Assumptions & Limitations of Study 1. The rates of material mentioned are prevailing market rates & may change as per the change in locality.

2. The study is also limited to the just after effect of implication of GST, further changes may have arrived in the tax rates, procedures etc. changes occurred post 2018 are not taken in consideration.

6 CONCLUSION

After review of different experts it can be concluded that GST has indirectly affect the wages of those working in small and informal units. The unorganized sector cannot cope with such a complicated tax.

It is not a favour upon the small businessman as he cannot give input credit because he is not under GST, person buying from him will have to give reverse charge. On the other hand livelihood of people working in unorganized sector was badly hit and many were rendered jobless after the centre came out with introducing the GST tax regime. The only benefit is to the owners of some MSME which is that Now, they are in the GST net, they can prove that they have basic minimum revenue, which has improved their chances of getting credit from banks. Increase in the number of registered taxpayers in the post-GST era is also an indication of a

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more formalized economy. It is beneficial to customers only if ITC is not withdrawn;

cost of construction tends to go down.

7 SUGGESTIONS

The government both central and state has to conduct awareness programmes and various literacy programmes about GST to its various stakeholders. Appropriate amendments to the Constitution are required.

REFERENCES

1. http://www.smbconnect.in/2017/Newslett er/July/Tax-System-India-Before-and- After-GST.pdf

2. https://pfpacjournal.blogspot.in/2017/09 /gst-impact-on-small-industry-and.html

3. https://www.quora.com/What-will-be-the- impact-of-GST-on-the-unorganised-sector 4. 4.https://economictimes.indiatimes.com/s

mall-biz/sme-sector/all-evidence-suggest- unorganised-sector-smes-worst-hit-by- demonetisation-arun-

kumar/articleshow/61542781.cms 5. https://economictimes.indiatimes.com/opi

nion/interviews/for-the-unorganised- sector-gst-is-more-of-an-income-tax-worry- dipak-gupta-kotak-mahindra-

bank/articleshow/61210985.cms 6. https://blog.saginfotech.com/gst-impact-

unorganised-sector

7. https://medium.com/@arpitguptacaclasse s/impact-of-gst-on-construction-industry- and-real-estate-856b4eba7aa8

8. https://economictimes.indiatimes.com/we alth/real-estate/experts-see-grey-spots-in- gst-on-under-construction-

flats/articleshow/59468376.cms

9. Meet H. Rawal1, Tej J. Patel2, Vikas V.

Vishwakarma3, Mr. Arpit Vyas4-Building Construction: Before & After GST