GST: Renegotiation of contracts for engineering firms on cards

Engineering companies face transition issues related to inputs and for signed but pending contracts. Engineering and construction projects are long-gestation projects, where contracts and the price of the final product are decided before work starts.

There will be a need to revisit many of these contracts since the framework for interstate sales, the C Forms, will disappear. 

“Similarly, with service tax being replaced by the GST, the full offset for inputs like cement and steel will have to be reworked,” said Vimal Kejriwal, managing director and chief executive officer, KEC International.

Sources said the industry faced issues over input and final product tax computation and was seeking clarifications from the government. “There will be a difference in contracts where the price was decided in the pre-GST regime. Most contracts have a statutory variation clause and will be renegotiated to make up for the price difference,” said an executive with an engineering, procurement and construction company. 

He added the period between inputs sourced and final product delivered could be anywhere between one and six months. 

“Contracts that have been signed and are yet to be executed will need to be renegotiated. Clients should be willing to do so, as they too will be able to offset the tax change with their end customers,” said M S Unnikrishnan, managing director and chief executive officer of Thermax.

“For projects under construction, execution of the balance of the project will be post-GST. In this case, input cost for half the project will be different. Engineering companies should be allowed to follow the pre-GST regime for such projects or the tax computation will become complex,” he said, adding companies were seeking a clarification on this from the government.

L&T is also seeking clarifications on various aspects. “Under the present tax system, a works contractor is entitled to credit of input services, which will be carried forward to the GST. However, he is not entitled to the credit of excise duty paid on inputs in the current system and there is no provision in the law to carry forward such credits. This seems to be an omission, as other categories of registered taxpayers are allowed to carry forward excise credit,” an L&T spokesperson said.

Clarifications are also being sought on projects which are exempted under the current regime, but not under the GST rule. "Currently, for exempted projects, a works contractor is not required to pay output service tax and hence the taxes paid on “inputs” and “input services” are not eligible as CENVAT credit." In the GST regime, the credit for inputs used in the exempted projects will be allowed to be carried forward under section 140(3) because this section covers all exempted service providers including exempted works contractors. However, the draft transitional rules do not cover this provision to carry forward the credit of “input services”. "This would require a correction as well,” the L&T spokesperson said.