The Tamil Nadu government has decided to bring in new guidelines related to government work contracts after the Goods and Services Tax (GST) regime came into force in July. Due to a lack of clarity in some of the rules, payments to contractors for ongoing works has been held back by the authorities after GST. The government has asked the departments to settle these amounts “on account” as it has started affecting the projects.
The state government is also examining the full implications of the GST on works contracts and government procurement. The Public Works Department and Highways Department are in the process of revising the schedule of rates to separate out taxes subsumed under the new GST regime from the schedule of rates, said a government notification.
“The government accordingly will notify detailed guidelines for evaluating the net change in tax liability on contracts for the purpose of payments to be made to the contractors and entering into supplementary agreements with contractors,” said the Finance Department order.
While existing contracts by various departments include clauses stating that risk arising due to change in law would be borne by procuring entities, existing works contracts in some departments do not provide for such a clause. The government has taken a policy decision that the risk on account of change in tax law in government works contracts due to the introduction of the GST shall be borne by the procuring entity.
The government also said that it has noticed that bills of existing contractors are being held up, ostensibly due to a lack of clarity on the treatment of GST. Delay in payment of bills for part of works already executed by contractors is likely to result in locking of their working capital and slowing down of works. There have also been enquiries and representations from contractors on non-payment of bills presented by them, apart from seeking compensation for increased tax liability on account of the implementation of GST.
Pending the notification of guidelines in the matter, the government has directed that all departments and procuring entities shall make ‘on account’ payment of bills presented by contractors. The state government has restricted the payments to the value due under existing contract agreements.
Any difference on account of final payment due based on the guidelines to be issued and the ‘on account’ payment made may be adjusted from out of the five per cent amount retained with the procuring entity. The payment of the final bill in cases where ‘on account’ payments have been made shall be made only after the notification of the guidelines.
Under the new tax regime, GST on works contracts for government work was initially notified at 18 per cent. This had resulted in representations from contractors of ongoing works for compensation by the procuring entity for increased tax liability over and above the contracted value of work.
The difficulties arising out of increased GST on works contracts for government work were deliberated upon during the GST Council meetings held on August 20 and September 9, 2017. Consequently, the GST rate on works contracts for government work is being reduced to 12 per cent. This move, more or less, balances the taxes on works contracts between the pre-GST and post-GST regimes, observed the department.