The State government will come out with detailed guidelines on the impact of GST on work contracts awarded by it, according to an order by the State Finance Department.
The GO has instructed all departments and procuring entities not to hold back payments to contractors on account of GST and release payments to them ‘on account’ basis (make partial payments) as per bills presented by them.
The final payments can be made only after the notification of the guidelines and can be adjusted from the 5% final payment withheld by the procuring entity, it added.
The government has taken a decision that the risk on account of change of tax law in government work contracts should be borne by the procuring entity. So the government departments have to bear the GST burden and pay it to the contractor.
However, it has been brought to the notice of the government that while some existing contracts had a clause stating that risk arising due to change in law would be borne by procuring entities, some department contracts did not have such a clause.
Due to the confusion over GST, the government has received complaints that bills of existing contractors were being held up.
Impact on contractors
On the one hand, delay in payment of bills was likely to result in locking the working capital of contractors and slowing down the work.
There have also been enquiries and representations from contractors on non-payment of bills.
The GST on contracts for government work was initially fixed at 18% and recently reduced to 12%. The move more or less balances the taxes on work contracts in the pre-GST and post-GST regime, said the Finance Department order.
“The decision to provide on account payments to contractors would ensure that working capital hiccups are avoided. Further, since the GST paid to the contractors would in any case accrue to the government, the incremental project funding to be borne by the government for the contract due to GST would be balanced by incremental GST collections to the government,” M.S. Mani, Partner, Deloitte India said.
