What are the Laws Affecting Construction Companies in India? 

Last Updated at: Dec 24, 2020
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construction companies

1. What is the status of Construction Companies in the Indian Market?

Construction Companies are growing at a fast pace. Construction is the largest industry sector in India after agriculture. It is one of the biggest contributors to the economic growth of India. Employing over 40 million people, it is also the second-largest employer in the country. Additionally, the Union Budget 2020, has put the focus on infrastructure for economic development. Moreover, the growth of the industry depends on several factors such as an increase in population, rapid urbanisation, and a rise in disposable income.

This has put the construction industry in a beneficial position right now and in the upcoming decades. Further, the demand for housing, development projects, etc. is just going to keep increasing. It is also speculated that India will become the 3rd largest construction market by the year 2025. Likewise, it is expected that by 2022, the construction industry will record a CAGR (Compound Annual Growth Rate) of 15.7%. The undertaken project to develop smart cities has also pushed the importance of this sector. Currently, the construction sector contributes 8% to India’s GDP.

2. What are the different types of laws regulating construction companies?

To start and manage a construction company some several factors should be kept in mind. Construction companies deal with various projects, big or small, they all require a method of regulation and management. Further, the construction industry in India depends highly on the legal system to get the work done which includes contracts, incorporation, taxation, etc. Additionally, the important laws that control and regulate the working of construction companies in India, namely – 

(i) The Companies Act, 2013

This mainly includes the incorporation of a company, management, and regulation. Click on the drop-down menu to see the process of registering a construction company in India. (Add here – mention dropdown)

Before starting a construction business, a formation of a company with the relevant objects, names, documents, etc. is necessary. Further, a Company in India is incorporated/registered under the provisions provided in the Companies Act, 2013. In the instant case, a construction company can also be registered in the same way. 

get legal advise

Before proceeding to register a construction company, a few aspects have to be considered which are – 

Type of Company

Under the Companies Act, only two types of companies can be registered viz. (i) Private Companies (ii) Public Companies. 

A construction company can be both private and public. When starting a construction business one can consider any of the above. Similarly, commonly, most construction companies are private because of the ease of management and registration process. Some examples of private companies operating in India are Larsen & Toubro Ltd. (L&T), Reliance Industries Ltd., Shapoorji Pallonji Group, etc. 

Reservation of Name

All construction companies are associated with a name. The companies act suggests that a company before registration has to propose six names in order of preference so that at least one of them will be approved as the name of the company. Further, this proposal is to be made to the Registrar, Central Registration Centre. According to the incorporation rules, the name can also be reserved online. Further, after approval, the registrar can reserve the name for 20 days. 

Forming the Object

Every company has to form a document called a ‘Memorandum of Association’ which consists of the objects and the possible scope of its operations. A company cannot go beyond the scopes and objects provided in the document. In the case of a construction company, the scope and object in the memorandum can be conducting construction activities and carrying out construction business in India. 

Preparing other documents

For the registration of a construction company, several documents are required to facilitate the registration process, which includes identity proofs such as Pan Card, Aadhar Card, Address proofs such as rental agreements in case of a rented property, electricity bill of the office, and contact information such as email ID, mobile number. 

Other formalities including the power of attorney to any professional such as a Chartered Accountant, Advocate, Company Secretary. The list of directors should also be formed prior to the registration. 

Filing of Application

After finishing all the above formalities and having the relevant documents, the next step is to file these documents with the Registrar within whose jurisdiction is the construction company going to be operating. 

Certificate of Application

After scrutinizing the documents and all the required legal formalities, payment of fees are complete the registrar shall enter the name of the company in the register of companies and certify its incorporation. After that, the registrar will then issue a certificate under his signature. The registrar will also provide a CIN or Corporate Identity Number which will be the unique identity of the company.  

(ii) The Indian Contract Act, 1872

All contracts will enforce and regulate under the Indian Contract Act, 1872. A construction company binds itself into several contracts when it takes up a project. This contract can be between two construction companies, a state government or central government, or a buyer. The various types of contracts in the construction industry will be discussed further. 

(iii) The Goods and Service Tax Act, 2017

All construction projects come under taxation norms. The Goods and Service Tax, 2017 has issued fresh guidelines and rates for the regulation of construction contracts and projects. 

(iv) Obtaining specific clearances and certificates (NOCs) from the Ministry of Environment and Forests

Environmental clearances are very important for a construction project before the project commences. This environmental clearance (EC) is obtained from the Ministry of Environment Projects. Any project which is greater than or equal to 20,000 sq. metres requires environmental clearance. Further, any township or area developing project covering more than 50 hectares needs clearance.

If the project is less than 20,000 sq. meters or 50 hectares as the case may be, then the EC will not require but the NOC/approval of the State Pollution Control Board, Local Municipal Committee/Panchayat, Approval of Fire Safety department, if applicable approval of the aviation department and if it is a forest area then the approval of the regional office of the Ministry of Environment and Forest will require.

4. What are the different types of Construction Contracts?

When a construction project starts, many legal formalities and dealings will take prior to the project. These include contractual relationships between parties. Additionally, the employer and the contractor form a construction contract before the project initiation. A construction contract is also a ‘work contract’ is one where an employer and a contractor form a contractual relationship for the construction of assets.

In India, there is no standard form of the construction contract. There are, however, some commonly used contracts that are published by the International Federation of Consulting Engineers, Institute of Civil Engineers, and the model published by the Indian Institute of Architects. Some different types of contracts commonly found in the construction industry are – 

(i) Engineering, Procurement and Construction Contracts (EPCs)

The most likeable form of contracts in the construction industry is the EPC form of contracts. Similarly, it creates a binding relationship between the contractor and the employer, where the employer transfers the risk of the construction and a basic design all in the hands of the contractor. Additionally, this creates efficiency in work and risk management which makes it the ideal choice of contractors and business owners. Further, it is the most common form of the contract in the construction industry. 

(ii) Turn-key Contracts

This model will also adopt frequently in the construction sector. Here, the employer hires a contractor to plan, design, and build an infrastructure project before a specific date. The contractors have to just “turn a key” to get the work complete. Further, this is advantageous because the completion process of the project is swift and fast. Additionally, it is seen frequently in large scale projects.  

(iii) Public-Private Partnership Contracts (PPP)

This is where the government or a statutory entity or an entity owned by the government enters into a contractual relationship with a private entity. It includes risk-sharing to the private sector, it benefits the public sector with more technical expertise, experience, and efficiency of the private sector. There are several types of PPP Contracts are namely, – 

  • Build-Operate-Transfer (BOT) where the private entity is responsible for the financing, construction, and operations before personality will transfer to the government. It is the most common type of PPP contract 
  • Build-Own-Operate-Transfer (BOOT)  the private partner completes the construction project for which concession grants. The public partner assists by giving tax exemptions and funding. 
  • Additionally, Build-Transfer-Operate (BTO) The private partner will permit to operate the facility for a specific time after the built infrastructure that transfers to the state. 
  • Further, Build-Own-Operate (BOO) where the asset ownership is with the private sector. Moreover, the private partner also builds, designs, owns, operates, and maintains the asset.

5. What kind of taxation laws are applied to a Construction Company?

Under the Goods and Service Tax Act, 2017 the contracts in construction projects are “work contracts”. Additionally, according to that, work contracts mean a contract for the building, construction, erection installation, fitting out, fabrication, etc. of immovable property only. Furthermore, according to this act work contracts are classified as a supply of service. 

Accordingly, the rates of GST are decided as given under – 

Type of Property 
Rate of GST 
Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of the completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier. (Provisions of paragraph 2 of this notification shall apply for valuation of this service) 
9%+9% 
composite supply of works contract as defined in clause 119 of section 2 of Central Goods and Services Tax Act, 2017
9%+9%
Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of, – (a) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958); (b) canal, dam or other irrigation works; (c) pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal
6%+6%
Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,- (a) a road, bridge, tunnel, or terminal for road transportation for use by general public; (b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana; (c) a civil structure or any other original works pertaining to the “In-situ rehabilitation of existing slum dwellers using land as a resource through private participation” under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana, only for existing slum dwellers; (d) a civil structure or any other original works pertaining to the “Beneficiary led individual house construction / enhancement” under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana; (e) a pollution control or effluent treatment plant, except located as a part of a factory; or (f) a structure meant for funeral, burial or cremation of deceased
6%+6%

 

Conclusion

In this day and age, starting a construction company is not an easy task. It includes several legal aspects that cannot overlook. Moreover, a lot of steps in making a construction company is easier with proper consultation and assistance. Similarly, registering a construction company with infrastructure at a specific location helps develop a separate identity for the company and facilitates its success. Additionally, contractual agreements for projects help safeguard the interests of the company and protect them from further liabilities. Hence, a dedicated legal consultation and assistance are helpful in all these aspects. 

 

 

What are the Laws Affecting Construction Companies in India? 

421

1. What is the status of Construction Companies in the Indian Market?

Construction Companies are growing at a fast pace. Construction is the largest industry sector in India after agriculture. It is one of the biggest contributors to the economic growth of India. Employing over 40 million people, it is also the second-largest employer in the country. Additionally, the Union Budget 2020, has put the focus on infrastructure for economic development. Moreover, the growth of the industry depends on several factors such as an increase in population, rapid urbanisation, and a rise in disposable income.

This has put the construction industry in a beneficial position right now and in the upcoming decades. Further, the demand for housing, development projects, etc. is just going to keep increasing. It is also speculated that India will become the 3rd largest construction market by the year 2025. Likewise, it is expected that by 2022, the construction industry will record a CAGR (Compound Annual Growth Rate) of 15.7%. The undertaken project to develop smart cities has also pushed the importance of this sector. Currently, the construction sector contributes 8% to India’s GDP.

2. What are the different types of laws regulating construction companies?

To start and manage a construction company some several factors should be kept in mind. Construction companies deal with various projects, big or small, they all require a method of regulation and management. Further, the construction industry in India depends highly on the legal system to get the work done which includes contracts, incorporation, taxation, etc. Additionally, the important laws that control and regulate the working of construction companies in India, namely – 

(i) The Companies Act, 2013

This mainly includes the incorporation of a company, management, and regulation. Click on the drop-down menu to see the process of registering a construction company in India. (Add here – mention dropdown)

Before starting a construction business, a formation of a company with the relevant objects, names, documents, etc. is necessary. Further, a Company in India is incorporated/registered under the provisions provided in the Companies Act, 2013. In the instant case, a construction company can also be registered in the same way. 

get legal advise

Before proceeding to register a construction company, a few aspects have to be considered which are – 

Type of Company

Under the Companies Act, only two types of companies can be registered viz. (i) Private Companies (ii) Public Companies. 

A construction company can be both private and public. When starting a construction business one can consider any of the above. Similarly, commonly, most construction companies are private because of the ease of management and registration process. Some examples of private companies operating in India are Larsen & Toubro Ltd. (L&T), Reliance Industries Ltd., Shapoorji Pallonji Group, etc. 

Reservation of Name

All construction companies are associated with a name. The companies act suggests that a company before registration has to propose six names in order of preference so that at least one of them will be approved as the name of the company. Further, this proposal is to be made to the Registrar, Central Registration Centre. According to the incorporation rules, the name can also be reserved online. Further, after approval, the registrar can reserve the name for 20 days. 

Forming the Object

Every company has to form a document called a ‘Memorandum of Association’ which consists of the objects and the possible scope of its operations. A company cannot go beyond the scopes and objects provided in the document. In the case of a construction company, the scope and object in the memorandum can be conducting construction activities and carrying out construction business in India. 

Preparing other documents

For the registration of a construction company, several documents are required to facilitate the registration process, which includes identity proofs such as Pan Card, Aadhar Card, Address proofs such as rental agreements in case of a rented property, electricity bill of the office, and contact information such as email ID, mobile number. 

Other formalities including the power of attorney to any professional such as a Chartered Accountant, Advocate, Company Secretary. The list of directors should also be formed prior to the registration. 

Filing of Application

After finishing all the above formalities and having the relevant documents, the next step is to file these documents with the Registrar within whose jurisdiction is the construction company going to be operating. 

Certificate of Application

After scrutinizing the documents and all the required legal formalities, payment of fees are complete the registrar shall enter the name of the company in the register of companies and certify its incorporation. After that, the registrar will then issue a certificate under his signature. The registrar will also provide a CIN or Corporate Identity Number which will be the unique identity of the company.  

(ii) The Indian Contract Act, 1872

All contracts will enforce and regulate under the Indian Contract Act, 1872. A construction company binds itself into several contracts when it takes up a project. This contract can be between two construction companies, a state government or central government, or a buyer. The various types of contracts in the construction industry will be discussed further. 

(iii) The Goods and Service Tax Act, 2017

All construction projects come under taxation norms. The Goods and Service Tax, 2017 has issued fresh guidelines and rates for the regulation of construction contracts and projects. 

(iv) Obtaining specific clearances and certificates (NOCs) from the Ministry of Environment and Forests

Environmental clearances are very important for a construction project before the project commences. This environmental clearance (EC) is obtained from the Ministry of Environment Projects. Any project which is greater than or equal to 20,000 sq. metres requires environmental clearance. Further, any township or area developing project covering more than 50 hectares needs clearance.

If the project is less than 20,000 sq. meters or 50 hectares as the case may be, then the EC will not require but the NOC/approval of the State Pollution Control Board, Local Municipal Committee/Panchayat, Approval of Fire Safety department, if applicable approval of the aviation department and if it is a forest area then the approval of the regional office of the Ministry of Environment and Forest will require.

4. What are the different types of Construction Contracts?

When a construction project starts, many legal formalities and dealings will take prior to the project. These include contractual relationships between parties. Additionally, the employer and the contractor form a construction contract before the project initiation. A construction contract is also a ‘work contract’ is one where an employer and a contractor form a contractual relationship for the construction of assets.

In India, there is no standard form of the construction contract. There are, however, some commonly used contracts that are published by the International Federation of Consulting Engineers, Institute of Civil Engineers, and the model published by the Indian Institute of Architects. Some different types of contracts commonly found in the construction industry are – 

(i) Engineering, Procurement and Construction Contracts (EPCs)

The most likeable form of contracts in the construction industry is the EPC form of contracts. Similarly, it creates a binding relationship between the contractor and the employer, where the employer transfers the risk of the construction and a basic design all in the hands of the contractor. Additionally, this creates efficiency in work and risk management which makes it the ideal choice of contractors and business owners. Further, it is the most common form of the contract in the construction industry. 

(ii) Turn-key Contracts

This model will also adopt frequently in the construction sector. Here, the employer hires a contractor to plan, design, and build an infrastructure project before a specific date. The contractors have to just “turn a key” to get the work complete. Further, this is advantageous because the completion process of the project is swift and fast. Additionally, it is seen frequently in large scale projects.  

(iii) Public-Private Partnership Contracts (PPP)

This is where the government or a statutory entity or an entity owned by the government enters into a contractual relationship with a private entity. It includes risk-sharing to the private sector, it benefits the public sector with more technical expertise, experience, and efficiency of the private sector. There are several types of PPP Contracts are namely, – 

  • Build-Operate-Transfer (BOT) where the private entity is responsible for the financing, construction, and operations before personality will transfer to the government. It is the most common type of PPP contract 
  • Build-Own-Operate-Transfer (BOOT)  the private partner completes the construction project for which concession grants. The public partner assists by giving tax exemptions and funding. 
  • Additionally, Build-Transfer-Operate (BTO) The private partner will permit to operate the facility for a specific time after the built infrastructure that transfers to the state. 
  • Further, Build-Own-Operate (BOO) where the asset ownership is with the private sector. Moreover, the private partner also builds, designs, owns, operates, and maintains the asset.

5. What kind of taxation laws are applied to a Construction Company?

Under the Goods and Service Tax Act, 2017 the contracts in construction projects are “work contracts”. Additionally, according to that, work contracts mean a contract for the building, construction, erection installation, fitting out, fabrication, etc. of immovable property only. Furthermore, according to this act work contracts are classified as a supply of service. 

Accordingly, the rates of GST are decided as given under – 

Type of Property 
Rate of GST 
Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of the completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier. (Provisions of paragraph 2 of this notification shall apply for valuation of this service) 
9%+9% 
composite supply of works contract as defined in clause 119 of section 2 of Central Goods and Services Tax Act, 2017
9%+9%
Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of, – (a) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958); (b) canal, dam or other irrigation works; (c) pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal
6%+6%
Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,- (a) a road, bridge, tunnel, or terminal for road transportation for use by general public; (b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana; (c) a civil structure or any other original works pertaining to the “In-situ rehabilitation of existing slum dwellers using land as a resource through private participation” under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana, only for existing slum dwellers; (d) a civil structure or any other original works pertaining to the “Beneficiary led individual house construction / enhancement” under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana; (e) a pollution control or effluent treatment plant, except located as a part of a factory; or (f) a structure meant for funeral, burial or cremation of deceased
6%+6%

 

Conclusion

In this day and age, starting a construction company is not an easy task. It includes several legal aspects that cannot overlook. Moreover, a lot of steps in making a construction company is easier with proper consultation and assistance. Similarly, registering a construction company with infrastructure at a specific location helps develop a separate identity for the company and facilitates its success. Additionally, contractual agreements for projects help safeguard the interests of the company and protect them from further liabilities. Hence, a dedicated legal consultation and assistance are helpful in all these aspects. 

 

 


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