With the initiation of goods and service tax from July 1, 2017, the indirect tax laws governing works contract have changed significantly.
Taxability of works contract under GST law
According to section 2(119) of the central goods and service tax act, 2017 (CGST act), the “works contract” is defined as a contract for Building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, and alteration or commissioning of any immovable property wherein property transfer in goods (whether as goods or in some other form) is involved in implementing such a contract.
In simple words, any contract related to an immovable property where services are provided along with the transfer of merchandise is known as a “Works Contract”. Examples of works contract could be building an apartment, renovating an existing office, installing solar power plants etc. The schedule II to CGST act also specified that the works contract are contract like the supply of services and are subjected to GST @ 18% except in some circumstances.
Further, as per provisions of section 17(5) (c) of the CGST act, the input tax credit (ITC) for works contract can be availed only by one who is in the same line of business and is using such assistance received for further supply of works contract service. Also, ITC will not be available to the recipient of works contract services when such services are received for building a fixed asset (other than plant and machinery), excluding an input service for an additional supply of works contract service. The aspects regarding taxability, rate of tax, availability of ITC pertaining to works contract were clarified under the CGST act to avoid confusion and litigation as had happened under erstwhile GST regime.
Taxability of works contract under pre-GST law
Works contract comprised of three types of taxable activities according to the preceding law. It included the supply of goods as well as the supply of services. If the latest product was designed throughout the works contract, then such manufacture became a taxable event. Formerly, the supply of goods was taxable in the form of VAT, and the service was taxable under service tax.
On the other hand, if a new and original product gets manufactured during the completion of the works contract, then the same contract gets taxed under the Central Excise Act before being taxed under the ST and VAT laws.
This created confusion and non-clarity concerning the taxability of the work contract. Hence, the introduction of GST aimed to put an end to this jeopardy created by the taxes thrusted by the Centre and State Governments, and we hope that in time to come, the litigation concerning work contract gets reduced under the GST laws.
GST rate on works contract
The notice for GST rates issued on 28/06/2017 explained GST rates on various forms of works contract, relying on the type of works contract and the service receiver and provider. Two GST rates have been confirmed for services carried out under a works contract: 18% and 12%. The GST rate on works contract for distinct classes are as follows:
|Canal, dam, water supply, sewage treatment||18%|
|Nationally significant historical monument, historic site||18%|
|Oil exploration works contract||18%|
|Works contract awarded to the sub-contractor by the main contractor, who provides the services to the government||12%|
|A pavement, bridge, canal or terminal for public use in road transportation||12%|
No abatement for works contract
Under GST, no decrement has been advocated for works contract service. The previous regime had a 60% depletion for the new works contract and a 30% decrement for repair works. Given that the service tax rate was 15% and the GST rate on works contract is 18%, it is fated that an additional tax burden will be imposed in the GST era.
Place of supply of works contract
Place of supply in the works contract under GST would always include fixed assets. In regard to this, section 12(3) of the IGST Act, 2017 commands the place of supply in which both the distributor and the receiver are detected in India. The location of supply shall serve as the place at which the immovable property is located. If the fixed assets are located outside India, but both the distributor and the beneficiary are detected in India, then the supply place would be the beneficiary’s location, which is India. If the supplier or the receiver is also located outside India, the place of supply shall be the location of the fixed assets.
Time of supply of works contract
In the instance of services, the time of supply is regulated as per sections 13 and 31 of the CGST act. Section 13 specifies that the time of supply of service is determined by the earliest of the following.
- Invoice issue
The bill is granted by the distributor within the time limit stated in section 31 or on the date of remittance receipt, whichever is preferable.
- Provision of service
If the bill is not issued as per the time stated in section 31 or by the date of payment receipt, whichever is comparatively early.
Under GST, a works contract is contemplated as a supply of services. There were ultimatums with the tax treatment of works contract under the previous regime. However, this changed with the execution of GST. GST aims to conclude the debate by defining what constitutes a works contract, implying that a works contract involves a supply of service and stating a blended rate of tax pertinent covering India on the equal value. As an effect of GST, the taxation of works contract will be simplified and easier to manage.
At AJSH, we assist our clients with various GST matters (GST registration, GST advisory, GST assessments, filing of GST returns, claiming GST audits) by providing them with adequate support and guidance from our end. If you have any questions or would like to know more about works contract, kindly contact us.