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.
As per section 2(119) of CGST Act “works contract” is defined as a contract for:
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”.
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:
Now, let’s see how GST has changed the taxation on Works Contract:
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.
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.
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:
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 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.
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%).
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.
As per Section 13, Point of taxation is determined based on time of supply as stated below:
Time of supply will be earlier of the two mentioned below:
Date of receipt of service in the books of account of the Recipient
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 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)
Two GST rates have been prescribed for services provided under Works contract i.e 18% and 12%.
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
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:
Composite supply of works contract supplied by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of:
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.