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Works contract means a service contract involving supply of goods to execute the contract. Hence, works contracts are a mixture of service and transfer of goods. Examples of works contracts are the construction of a new building, erection, installation of plant and machinery.The article covers applicability of GST on works contracts in detail.
Works contracts consisted of three kinds of taxable activities as per the previous law. It involved supply of goods as well as supply of services. If a new product was created during the works contract, then such manufacture became a taxable event. Previously, the supply of goods was taxable in the form of VAT and the service was taxable under service tax.
If a new product appeared in the process of completing a works contract, Central Excise duty was levied. So, different aspects of one single activity were taxed by different laws. This caused a lot of confusion regarding treatment and taxability which is why there were so many legal disputes related to works contracts. GST aims to put an end to the uncertainty for the legislature.
Unlike the previous VAT and Service Tax regulations, the term “Works Contract” has been limited to any work performed for a “Immovable Property” under GST. Whereas, erstwhile laws considered contracts for movable property into account.
As per GST, A contract for the construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration, or commissioning of any immovable property in which the transfer of property in goods (whether as goods or in another form) is involved in the execution of such contract is referred to as a “works contract”.
Any such composite supply on products, such as a fabrication or paint job in an automotive body shop, will not fall under the GST definition of term works contract per se. Such contracts would continue to be composite supply, but they would not be considered a Works Contract for GST purposes.
GST Schedule II clearly mentions that the following are supply of service–
Thus, GST has removed the confusion regarding the tax treatment. This means works contract will be treated as service and tax would be charged accordingly (not as goods or part goods/part services).
This treatment of works contracts as service and not as supply of goods will bring in much needed clarification to the works contracts. Under the previous regime, different states had different schemes for VAT. There were different composition schemes with different VAT rates. Service tax too was complex with 60% abatement on new works and 30% abatement on repair contracts. GST solves such with a much simpler straightforward calculation.
GST Law mentions that input tax credit is not available for-
Input tax credit is available to both a builder and a taxable person while constructing plant and machinery. But input tax credit is not available to any taxable person who constructs on his own account even if it is for business use.
As a result, ITC for works contract can only be obtained by someone who is in the same line of business as them and is using the services they have received to supply more works contract services. A building developer, for example, may hire a subcontractor to complete a section of the project. In the tax invoice sent to the principal contractor, the subcontractor will charge GST.
Because his output is a works contract service, the main contractor will be able to claim ITC on the tax invoice raised by his subcontractor. However, if the primary contractor supplies a company in the IT industry with a works contract service (other than plant and machinery), the ITC of GST paid on the invoice created by the works contractor will not be available to the IT company.
No abatement had been prescribed for works contract service under GST. Previously, VAT was payable on the works contract. Service tax was paid @15% on either 40% (on new work) or 70% (on repair, maintenance work).
Due to no abatement/ composition is provided, it has led to significant increase in tax burden, especially the works contract is taxed at standard GST rate (which is 18%) and even though subjected to lower tax rate (12%).
The GST rates applicable for various class of works contracts are as follows:
|Description||HSN Code||GST rate|
|Composite supply of works contract supplied to government by way of construction or repair of monuments, canal, dam, pipeline or water supply or sewage treatment or disposal or government schemes||9954||12%|
|Construction services as works contract for a building project – affordable housing||9954||12%|
|Works contract mostly involving earth work to government||9954||5%|
|Oil exploration works contract (construction)||9954||12%|
|Works contract by sub contractor to main contractor (construction) who in turn provides above services to the government||9954||12%|
The value of a works contract service is determined by whether the contract includes a land transfer as part of the works contract. In the case of a service supply involving the transfer of property in land or an undivided share of land, the value of the service and commodities element of the supply shall be equal to the entire amount charged for the supply less the value of the land or undivided share of land, as the case may be.
One third of the entire price paid for such supply will be deemed to constitute the value of land or an undivided share of land, as the case may be.
Immovable property would be required for a GST works contract. As a result, where both the supplier and the recipient are located in India, Section 12(3) of the IGST Act, 2017 governs the location of supply. The location of the immovable property would be the source of supply.
If the immovable property is located outside of India but both the supplier and the recipient are in India, the place of supply will be determined by the proviso to Section 12(3) of the IGST Act, 2017.
When either the Supplier or the Recipient is located outside India, the place of supply is the place where the immovable property is located or planned to be located, according to Section 13(4) of the IGST Act, 2017.
Composition scheme is available to works contractors from April 2019 provided turnover is up to Rs.50 lakhs. Earlier, the composition scheme was not available to service providers and was open to only available to suppliers of goods. This was a big blow to the small sub-contractors who cannot opt for the composition scheme. They were forced to register for the normal taxation scheme increasing their compliances and costs. With the composition scheme extended to service providers, small service providers can benefit.