The taxation laws on Works Contracts have changed since the implementation of GST. This guide by earlyGST will help you understand how various concepts of GST like time, place, valuation of supply and input tax credit are applicable on works contract under GST.

Works Contract under GST

Last Update Date : April 30, 2018

The taxation laws on Works Contracts have changed since the implementation of GST. This guide by earlyGST will help you understand how various concepts of GST like time, place, valuation of supply and input tax credit are applicable on works contract under GST.

works contract under gst

What is Works Contract?

As per section 2(119) of CGST Act “works contract” is defined as a contract for:

  • building, construction,
  • fabrication,
  • completion, erection, installation,
  • fitting out,
  • improvement, modification,
  • repair, maintenance, renovation,
  • alteration or commissioning

of any Immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.

In simple words, any contract in relation to an Immovable property where services are provided along with transfer of goods is known as a “Works Contract”.

Works Contract in Pre-GST Regime

Different aspects of an activity were taxed differently in the pre-GST regime as mentioned below:

Aspect in the Works Contract Tax Applicable
Provision of Services Service Tax
Transfer of Goods VAT
Goods manufactured in course of contract Central Excise

Let us understand the complications that a provider of works contract would encounter previously:

  • VAT being a state tax, different States had different VAT rates
  • Different VAT composition schemes in every state
  • Different abatement rates for new works contract and repair works contract in service tax
  • Maintenance of large amount of VAT documentation

Works Contract under GST

Now, let’s see how GST has changed the taxation on Works Contract:

Supply of Service or Supply of Goods?

A simpler treatment has been introduced for Works Contract under GST. Schedule II clearly states that Works Contract amounts to supply of services, hence the confusion whether it will be categorised as supply of service or goods has been done away with. A single rate has been fixed for services provided under Works contract and the entire amount shall be taxed at this rate without any bifurcation between goods and services.

Contract for Immovable property only

Under the GST regime the scope of works contract has been restricted to any activity undertaken in relation to Immovable property only, unlike the previous regime where works contract for movable properties was also considered.
For example: Any composite supply of paint job done in an automotive body shop will not fall within the definition of term works contract per se under GST. Such contracts would continue to remain composite supplies, but will not be treated as a Works Contract for the purposes of GST.

Separate Works Contract Account

A separate account for works contract must be maintained by a registered taxable person who is executing work contract. Following information must be maintained in this account:

  • name and address of persons on behalf of whom works contract is executed
  • description, value and quantity of goods or services received and utilized for works contract
  • details of payment received in respect of every works contract undertaken
  • name and address of supplier from whom he received goods or services.

Decentralised Service Registration

As per the rules laid down under CGST Act, every person whose aggregate turnover crosses the threshold limit of Rs.20 lakh and Rs 10 lakh in Special Category States) must compulsory take registration. This applies to provider of Works Contract as well. Thus, every state where a works contractor has a project office, he will need to obtain a registration.

Composition Scheme

Composition scheme is not available to works contractors as it is treated as service under GST. Composition scheme is only available to suppliers of goods and the restaurant industry (not serving alcohol). He will have to register as a normal supplier on crossing the 20 Lakh threshold. Hence, small sub-contractors will have to incur increased cost of compliance as they cannot opt for composition scheme.

Abatement

No abatement has been prescribed for works contract under the GST law. Hence it may lead to significant increase in tax burden, especially if such works contract is taxed at Standard GST rate (which is 18%) and even if subjected to lower tax rate (12%).

Input Tax Credit for Works Contract

As per section 17(5) of CGST Act, Input tax credit shall not be available in respect of works contract services availed by a person for constructing an immovable property (other than Plant and Machinery). ITC for works contract can be availed only by those who are in the same line of business and is using such services received for further supply of works contract service (e.g. ITC in respect of bill raised by sub-contractor is allowed to the main contractor). Plant and Machinery in certain cases, when affixed permanently to the earth, would constitute immovable property. Thus, where a works contract is for the construction of plant and machinery, the ITC of the tax paid to the works contractor would be available to the recipient.

Time of Supply

As per Section 13, Point of taxation is determined based on time of supply as stated below:

Normal Cases

Time of supply will be earlier of the two mentioned below:

  1. Date of Issue of Invoice (if Invoice issued within 30 days of supply of services) or Date of Provision of Service (if Invoice not issued within 30 days)
  2. Date of Receipt of Payment (Date on which the payment is entered in the books or credit to the bank account whichever is earlier)

In Any Other Case

Date of receipt of service in the books of account of the Recipient

Place of Supply

Place of supply will help a taxable person to determine whether he has undertaken an inter-state or an intra-state supply. As per the provisions under GST, works contract will necessarily involve an immovable property. Place of supply will be the place where the immovable property is located or intended to be located. However, in a case where the immovable property is located outside India, but both the recipient as well as the supplier are located in India, the place of supply shall be the place of the recipient.

Valuation

Valuation of the services provided by a works contractor is the total consideration charged. In a case where the works contract includes the transfer of property in land or undivided share of land, as the case may be, the valuation will be calculated as follows:
(total amount charged for such supply) minus (value of land or undivided share of land)

Where:

  • The total amount charged means sum of consideration charged for aforesaid service and amount charged for transfer of land or undivided share of land, as the case may be (total amount charged)
  • and value of land/undivided share of land is 1/3rd of the total amount charged for such supply.

Rates of GST for Works Contract

Two GST rates have been prescribed for services provided under Works contract i.e 18% and 12%.

GST @ 18%

Construction of 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 completion certificate

Composite supply of works contract

GST @ 12%

Composite supply of Works contract to the Government, local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of:

  • Historical monument, archaeological site or remains of national importance
  • Canal, dam or other irrigation works
  • Pipeline conduit or plant for
    o Water treatment
    o Water supply
    o Sewerage treatment/disposal
  • a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession
  • a structure meant predominantly for use as
    o an educational
    o a clinical
    o an art or cultural establishment
    o a residential complex predominantly meant for self-use or the use of their employees

Composite supply of works contract supplied by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of:

  • a road, bridge, tunnel, or terminal for road transportation for use by general public.
  • a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana
  • a pollution control or effluent treatment plant, except located as a part of a factory
  • a structure meant for funeral, burial or cremation of deceased
  • railways, excluding monorail and metro
  • a single residential unit otherwise than as a part of a residential complex
  • low-cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India
  • post-harvest storage infrastructure for agricultural produce including a cold storage for such purposes
  • mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages

A works contract is treated as supply of services under GST. Under the previous regime, there were issues in tax treatment of works contract. Both the Central Government (on the services component of a works contract) & the State Governments (on the sale of goods portion involved in the execution of a works contract) used to levy tax. Thus, the same contract was subject to taxation by both Central and State Government. GST aims to put at rest the controversy by defining what will constitute a works contract (applicable for immovable property only), by stating that a works contract will constitute a supply of service and specifying a uniform rate of tax applicable on same value across India. Thus, under GST, taxation of works contract will be simpler and easier to administer.

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