"Handling GST Non-compliance in Competitive Construction Contracts

This is a common issue in competitive markets where GST compliance clashes with practical business realities. Here’s a structured approach to addressing this while ensuring compliance and maintaining competitiveness:

1. Legal Position: GST Liability

• Under Section 9 of the CGST Act, 2017, the supplier of services (your clients) is responsible for collecting and remitting GST to the government, irrespective of whether the customer pays the GST.
• Failure to remit GST, even if not collected, could lead to penalties, interest, and legal consequences for your clients.

2. Practical Recommendations for Compliance and Competitiveness

a. Build GST into the Quoted Price

• Instead of separately quoting the GST amount, your clients can offer an all-inclusive price (e.g., "₹1,18,000 inclusive of GST") to avoid resistance from customers.
• Customers may not perceive the GST as an additional burden if it is not separately highlighted.

b. Educate Customers

• Emphasize the input tax credit (ITC) benefit to customers registered under GST, who can claim ITC on the GST paid. For B2B transactions, this can offset the GST cost.
• Highlight that non-compliance (e.g., working without charging GST) may attract scrutiny or penalties for customers in the long run.

c. Contracts and Agreements

• Include a clause in agreements clearly stating that the price includes GST or that GST is payable separately by the recipient. This protects your client’s position in case of disputes.

d. Adjust Pricing Strategy

• In highly competitive environments, consider marginally reducing the base price to offset the GST impact without eroding the overall profitability.

e. Payment Collection Strategy

• Implement milestone-based invoicing and clearly specify the GST component in each milestone.
• Collect GST upfront or in installments along with progress payments to avoid cash flow issues.

3. Addressing Non-Compliance Risks

• Do Not Absorb GST Entirely: Absorbing GST by treating it as part of your client's cost (without invoicing GST separately) could result in:
  • Reduced profit margins.
  • Legal consequences if detected during audits, as tax authorities may demand GST payment with penalties.
• Document Efforts to Collect GST: Maintain records of attempts to collect GST from customers to demonstrate intent to comply in case of scrutiny.

4. Alternative Measures

• Volume-Based Pricing: Offer competitive all-inclusive prices for larger projects to make the GST more palatable to customers.
• Reverse Charge Mechanism (RCM): Confirm whether the work falls under reverse charge provisions. If so, the recipient would be responsible for paying the GST.
• Seek Professional Mediation: Engage a tax consultant to negotiate with customers and explain the legal necessity of paying GST.

5. Long-Term Strategies

• Awareness Campaign: Conduct small workshops or issue newsletters to customers explaining the importance of GST compliance and its benefits (e.g., ITC).
• Engage in Industry Advocacy: Collaborate with other providers to create a unified front, discouraging non-compliant practices like GST evasion in the industry.

6. Conclusion

Your clients must remain GST-compliant while adopting customer-friendly strategies to mitigate resistance. Pricing inclusively, educating customers, and documenting efforts will help balance compliance with competitiveness. For chronic defaulters, your clients may need to evaluate whether retaining such customers is worth the legal and financial risks.

Works contractors who didn't comply with GST:
• If a works contractor's turnover exceeds the threshold, registration and GST at 18% (or the concessional rate for government or affordable works) apply. Non-compliance leads to demands under Sec 73/74 with interest and penalty, and potentially Sec 63 best-judgement assessment.
• Regularise: register now, file returns going forward, and voluntarily pay tax on past supplies via DRC-03 with interest. Penalty is avoided if paid before an SCN under 73. Under 74, a 15% penalty before the SCN.
• Recipients (if registered) can't claim ITC on past unbilled supplies, unless proper invoices are issued.
• For government contracts, GST TDS (Sec 51) deducted by government departments appears in the cash ledger once registered. It can be used.