Works contract was treated as both goods and supply in the pre-GST regime. Both VAT and service taxes were applicable on it. There were various rates, composition schemes available for works contractors with many complexities thus resulting in many case laws.
Union Budget 2021 Outcome
1st February 2021: para 7 of schedule II of CGST Act is removed. Further, section 7 of the CGST Act was amended to include a new clause under the definition of supply. It now includes activities or transactions involving the supply of goods or services by any person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration. Earlier, this transaction would have been considered as only supply of goods under schedule II. So, the scope is expanded now for levy. The change will apply once CBIC notifies.
Schedule II of the GST Act has certain activities clearly classified as goods or services under GST to avoid any such confusion
Works contract is a composite supply involving both goods (bricks, cement, steel bars and many other items) and services (labour for construction, architect, engineers etc).
Currently, VAT is payable on the works contract (rate varies from state to state). Service tax is paid @15% on either 40% (on new work) or 70% (on repair, maintenance work)
There’s a works contract for a new construction value of Rs. 50,00,000.
Under VAT & service tax:
|Cost of material
|Cost of labour
|Value of land
Now entire works contract under GST will be treated as supply of services. The value of a supply would typically be the transaction value ie in this case Rs.50 Lakhs and tax applicable is 18%
|VAT @14.5% (20 lakhs*14.5%)
|Service Tax @ 6% (40% of 15%)
|OR Pay tax under composition scheme
(45=50: value of land 5)
0.6% on Rs. 45 lakhs= 27,000
||Assuming 18% GST
Thus, the innumerable complexities and confusion regarding the works contact tax treatment is simplified under GST.
Activities clearly classified as goods or services under GST will help to remove complexities and reduce legal action.
Visit ClearTax to read about activities which will be treated as supply irrespective of consideration and other GST terms