Government contractors and Engineering, Procurement, and Construction (EPC) companies executing infrastructure projects face complex GST compliance obligations. The tax treatment of EPC contracts, royalty deductions, and operation and maintenance (O&M) components requires careful analysis.
This article explains the GST treatment of government and EPC infrastructure contracts.
GST on EPC Contracts
EPC contracts are typically composite supplies involving both goods and services. The GST treatment follows the 70:30 formula :
- 70% of the contract value is treated as supply of goods, taxed at 5% GST (for specified infrastructure sectors like renewable energy).
- 30% of the contract value is treated as supply of services, taxed at 18% GST .
This formula applies to renewable energy and other specified infrastructure projects.
NHAI Clarification on O&M Components
The National Highways Authority of India (NHAI) has issued clarifications on GST applicability for O&M components in EPC projects under the Change in Law mechanism. For bids invited from June 16, 2021, onwards, GST is payable at the applicable rates as bids were sought exclusive of GST.
Royalty Deductions and RCM
Government contractors often face GST demands on royalty deductions from their bills. GST authorities have raised demands under RCM on royalty amounts deducted by government departments. Contractors have challenged these demands, arguing that royalty deductions are not a supply of services by the contractor.
GST on Toll Collection Rights
The Rajasthan High Court has ruled that toll collection rights are taxable consideration for highway construction services provided to NHAI. This decision impacts public-private infrastructure projects.
ITC for EPC Contractors
EPC contractors can claim ITC on eligible inputs and input services used in executing the contract. However, ITC is blocked on works contract services used for construction of immovable property for own use.
Compliance for Government Contractors
- Determine the correct GST rate for the contract (70:30 or 18%).
- Address royalty deductions and RCM demands.
- Claim ITC on eligible inputs.
- Maintain proper documentation for all transactions.
- Monitor judicial developments on EPC taxation.
Conclusion
Government contractors and EPC companies face significant GST compliance challenges, including the 70:30 formula, royalty deductions, and O&M components. Proper tax planning and documentation are essential.
At Anuj Desai & Associates, we provide expert advisory services on GST for government contractors and EPC companies. Our team can help you structure your contracts, claim ITC, and respond to GST demands.
For a confidential consultation, contact us at office@anujdesaiassociates.com or call 9619456656. Visit our website at https://anujdesaiassociates.com or connect with our founder on LinkedIn at linkedin.com/in/ca-anuj-desai-122547230.