Metro construction companies could offset increased cost with lower GST

Larsen and Toubro is building Rs 160-bn metro rail project

With the Goods and Service Tax (GST) rate on the metro and monorail construction being brought down to 12 per cent from 18 per cent, the EPC (engineering-procurement-construction) contractors in the space would get benefited provided their contracts were bid out factoring in the tax component.

Essentially, if the EPC contractor had bid for the metro or monorail construction contract on base price excluding taxes, then the decline in GST slab would prove to be an advantage for the company in as the overall cost would decline. However, if the contract was bid out, including the tax component, the end cost would remain unchanged.

According to experts some of the contractors who were under stress due to higher costs would get some relief. "This is a positive step in many ways for the industry. First, the Capex for the projects will come down. Secondly, there will be a significant reduction in the working capital, as fewer funds will be locked in the advance payment of taxes and lastly the reconciliation of books will improve among the stakeholders such as project commissioning agency, contractor and sub-contractors or vendors," said S N Subrahmanyan, chief executive officer and managing director, Larsen & Toubro.

Larsen and Toubro is building Rs 160-billion metro rail project. The first phase of the 72-km project was inaugurated in November.

The Union Finance Minister Arun Jaitley-headed GST Council has recommended cut in GST rates for 83 goods and services covering many sectors and commodities. The council reduced GST rate on the construction of metro and monorail projects (construction, erection, commissioning or installation of original works) from 18 per cent to 12 per cent.

Companies like Reliance Infrastructure, Larsen and Toubro, NCC Infra, Simplex Infrastructures, JMC Projects, TPL-CHEC (a joint venture between Tata Projects and China Harbour Engineering Company), and Mumbai-based J Kumar Infraprojects are players in the sector.

Icra, in a recent report, had said the metro rail sector has seen strong traction in the last couple of years and is expected to provide sizeable opportunities for construction companies over the next three to five years due to a strong pipeline of projects which are in the approval and planning stage.

At present, the Central government encourages cities with above 2 million in population to develop mass transit systems Bombardier is pursuing various metro projects such as Delhi Metro, Bengaluru Metro Phase II, Mumbai Metro Phase III, Vizag Metro and light rail for cities of Kerala.

Cities like Kolkata, Chennai, Delhi, Bangalore, Gurgaon, Mumbai and Jaipur already have metro systems. But with nearly 50 cities and towns in line for modern metro systems, Tier-II cities are poised to witness the next big wave.