GST on Works Contract

Under GST Law, works contract has been restricted to any work undertaken for immovable property. As per para 6(a) of Schedule II of the CGST Act, works contract as defined above shall be treated as “Supply.” Thus there is a clear demarcation of a works contract as a supply of service under GST. In this article, we look at GST on works contract in detail.

Definition of Works Contract

As per section 2(119) of CGST Act “works contract” means 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 terms, a works contract is essentially a contract of service which may also involve the supply of goods in the execution of the contract. It is basically a composite supply of both services and goods, with the service element being dominant in the contract between parties.

Works Contract under Services Tax & VAT

Works contract has elements of both provisions of services and sale of goods. Hence, the same was taxable under both VAT and service tax.

Service Tax

Section 65B of the Finance Act 1994 defines Works contract as a contract wherein it involves a transfer of property in goods and executing such contract in the execution of such under GST for sale of goods. The contract shall apply for only the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property. By virtue of section 66E of the Finance Act, 1994, the service portion involved in the execution of works contract shall apply as service. Hence service tax applies only to the service element of the works contract. The principle of segregation of the value of goods was provided in rule 2A of the Service Tax (Determination of Value) Rules, 2006. Know more about works contract under service tax.

VAT

In the case of Gannon Dunkerly, the honorable Apex court has held that in case of works contract, the dominant intention of the contract is the execution of works, which is a service, and there is no element of sale of goods (as per Sale of Goods Act). The contract applies as an indivisible contract, no changes broken up to levy VAT on the sale of goods involved in the execution of works contract. This decision led the government to amend the constitution on India as insert Article 366 (29A)(b) which enabled the state government to levy a tax (VAT) on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract.

Input Tax Credit for Works Contract

As per section 17(5) (c) of the CGST Act, 2017, the input tax credit will not be available in respect of the works contract service when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service. Thus, an input tax credit for works contract can be availed only by one who is in the same line of business and is using such services received for further supply of works contract service.

Illustration

If a building contractor may engage the services of a sub-contractor for a certain portion of the whole work, then the sub-contractor will charge GST in the tax invoice raised to the main contractor. The main contractor will be entitled to take ITC on the tax invoice raised by his sub-contractor as his output is a works contract service. However, if the main contractor provides works contract service (other than for plant and tools) to a company say in the IT business, the ITC of GST paid on the invoice raised by the works contractor will not be available to the IT Company. Plant and Machinery, in certain cases, when affixed permanently to the earth, would constitute immovable property. When a works contract executed for the construction of plant and machinery, the recipient can view the ITC of the tax paid to the works contractor, as per the business of the recipient. This is because works contract in respect of plant and machinery comes within the exclusion clause of the negative list and ITC would be available when used in the course or furtherance of business.

Maintenance of Records for Works Contract

As per Rule 56 (14) of the CGST Rules, 2017, every registered person executing the works contract should keep the separate accounts for works contract showing:

The names and addresses of the persons on whose behalf the works contract is executed;
Description, value, and quantity (wherever applicable) of goods or services received for the execution of works contract;
Description, value and quantity (wherever applicable) of goods or services utilized in the execution of works contract;
The details of payment received in respect of each Works contract; and
The names and addresses of suppliers from whom he received goods or services.

GST Rate

The following details the GST Rate for Works Contract Services:

S. No.	Services	Rate
1	Construction of a 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 the completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier. (Provisions of paragraph 2 of this notification shall apply for valuation of this service)	9%CGST + 9%SGST
2	composite supply of works contract as defined in clause 119 of section 2 of Central Goods and Services Tax Act, 2017	9% CGST + 9% SGST
3	Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of, - (a) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958); (b) canal, dam or other irrigation works; (c) pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal	6% CGST + 6% SGST
4	Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of: (a) a road, bridge, tunnel, or terminal for road transportation for use by the general public; (b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana; (c) a civil structure or any other original works pertaining to the “In-situ rehabilitation of existing slum dwellers using land as a resource through private participation” under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana, only for existing slum dwellers; (d) a civil structure or any other original works pertaining to the “Beneficiary led individual house construction/enhancement” under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana; (e) a pollution control or effluent treatment plant, except located as a part of a factory; or (f) a structure meant for funeral, burial or cremation of deceased	6% CGST + 6% SGST 6% CGST + 6% SGST
5	Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied by way of construction, erection, commissioning, or installation of original works pertaining to,- (a) railways, excluding monorail and metro; (b) a single residential unit otherwise than as a part of a residential complex; (c) low-cost houses up to a carpet area of 60 square meters 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; (d) low-cost houses up to a carpet area of 60 square meters per house in a housing project approved by the competent authority under- (1) the “Affordable Housing in Partnership” component of the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana; (2) any housing scheme of a State Government; (e) the post-harvest storage infrastructure for agricultural produce including cold storage for such purposes; or (f) mechanized food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages Services provided to the Central Government, State Government, Union Territory, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of – (a) a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession; (b) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment; or (c) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in paragraph 3 of the Schedule III of the Central Goods and Services Tax Act, 2017	6% CGST + 6% SGST
6	Construction services other than (i), (ii), (iii), (iv), (v) & (vi)	Above 9% CGST + 9% SGST

Place of Supply for Works Contract

Place of Supply for Works Contracts under GST shall involve immovable property. As per Section 12(3) of the IGST Act 2017, the place of supply the supplier and the recipient should be located in India. The place of supply shall act as the place at the location of the immovable property. If the immovable property as per the place of supply located outside India but the supplier and recipient located in India, then the place of supply shall act as per Section 12(3) of the IGST Act 2017. However, if the supplier and recipient located outside India and the immovable property are in India, the place of supply shall apply as per Section 13(4) of the IGST Act, 2017. Click here to register a Public Limited Company, One Person Company or Private Limited Company