written by Khatabook | September 13, 2021

Impact Of GST On Works Contracts

A works contract is primarily a service contract that may also include the supply of items as part of the contract's execution. By definition, a works contract is a legal agreement to carry out work or other considerations such as construction, installation, modification, repairs, maintenance, or renovation of any immovable property in exchange for cash.

A works contract regarding immovable property, for example, would be a subcontract for construction work undertaken by a subcontractor. A composite supply in connection to the moveable property, such as painting or annual maintenance contracts, would also fall under the wide concept of a works contract. As a result, a works contract is essentially a provision of both goods and services, with the service aspect predominating in the contract between two parties. 

Works contract under GST

Let's learn all about the Goods and Services Tax (GST) and its impact on works contracts

Pre-GST Works Contract

Before introducing the GST, the tax was levied on service parts and goods parts transferred through Works Contract under the terms of Service Tax and Value Added Tax (VAT) Laws. Before establishing the service tax law in 1994, the VAT tax was solely charged on the sale of products. On a works contract, a person had to pay both service tax and VAT.

According to the existing law, there are three types of taxable activities in a works contract. If a new product is developed during the works contract, the manufacturing will become a taxable event. Work contracts cover building construction, maintenance and repair of plant and machinery and the installation, repairs, and modification of any movable or immovable property. The tax information under the pre-GST regime is listed below:

 

Works contract tasks

 

Tax Type

Supply of goods 

VAT

Supply of services

Service tax

If a new product emerges while a work contract is being completed

Excise duty 

Although works contracts is a single document, the different activities involved in the contract may be taxed differently depending on the type of work. This leads to a lot of ambiguity in terms of treatment and taxability, resulting in many legal conflicts over works contracts. However, the implementation of the GST has provided clarity on this matter, putting an end to the legislative confusion.

Also Read: GST Explained for Everyone

Works Contract under GST

Unlike the VAT and Service Tax laws, which evaluate work contracts for movable properties, the GST regulations define "work contract" as any job undertaken in any "immovable property." 

The Central Goods and Services Tax (CGST) establishes Section 2 subsection (119): A works contract involves transferring property in goods or other forms as part of the contract's execution. 

Regarding GST, the works contract has been confined to contracts for construction, manufacturing, and other aspects of any immovable property. According to the GST law, fabrication or paintwork in an automobile body shop isn't included in the works contract category. As a result, these contracts will be recognised as combined supply contracts for goods/commodities, but they would not be treated as works contracts.

Schedule II explains how "Supply of Service" will be handled, where the works contract has been specified, such as the construction of a building, civil structure, complex or a portion. Or it can consist of information on a complex or building available for sale to a buyer, in whole or in part with proof of completion or a completion certificate. In this case of construction, there is no works contract GST rate because the supply has become immovable property, and GST cannot be charged on the sale of immovable property. This approach of works contracts as a service rather than a supply of goods has provided much-needed clarity on the GST rate for works contracts

GST Rate on Works Contract

The notification for GST Rates issued on 28.06.2017 defined GST rates on various forms of works contract, depending on the type of works contract and the service receiver and provider. 

Two GST rates have been established for services performed under a Works contract: 18% and 12%. The GST rate on works contract for different classes are as follows:

Services rendered to the government in the form of construction or repair of: 

Canal, dam, water supply, sewage treatment 

18%

Nationally significant historical monument, historic site

18%

Oil exploration works contract.

18%

Works contract awarded to the subcontractor by the main contractor, who provides the services mentioned above to the government.

12%

A road, bridge, canal, or terminal for public use in road transportation.

12%

Works Contract- Input Tax Credit (ITC)

The mechanism for claiming Input Tax Credit in GST is much broader than in the previous indirect tax regime. One of the most significant benefits anticipated from implementing the GST Act is eliminating the cascading effect by enabling the seamless flow of credit.  According to Section 17(5)(c) of the CGST Act, 2017, no input tax credit will be available for works contract services provided for the construction of immovable property unless it is an input service for the subsequent supply of works contract.

Under GST, a continuous flow of tax credits is ensured by allowing the purchasing dealer to claim ITC for GST paid by the providing dealer. ITC is defined as an Integrated Goods and Services Tax (IGST)/Central Goods and Services Tax (CGST)/State Goods and Services Tax (SGST) credit charged on any supply of goods or service. A registered taxpayer is eligible to claim ITC that has been credited to the e-credit ledger, subject to the conditions specified, with no restrictions on availing it.

The recipient of works contract services cannot claim Input Tax Credit when given to construct an immovable asset unless it is an input service for the subsequent supply of works contract. For example, ABC Contractors are constructing an immovable property. They cannot claim any ITC on the works contract because of the nature of the property. However, ABC hires PQR Contractors for a portion of the works contract. In this case, ABC can claim ITC on the GST charged by PQR Contractors.

Keeping Records for Works Contract

According to the CGST Act of 2017, any individual who is registered to execute a works contract must maintain records of:

  • Information of the contractor or the individuals on whose behalf the works contract is executed
  • Payment received for a work contract
  • Description, value, and volume of goods or services received or used in the performance of the works contract;
  • Names and addresses of suppliers from whom he obtained goods or services.

Maintaining these records can help in eliminating any dispute that may arise in future regarding the works contract. It can aid in legal requirements and keep a proper trail of the works done. 

No Abatement for Works Contract

Under GST, no abatement has been recommended for works contract service. The previous regime had a 60% reduction for new works contract and a 30% abatement for repair works. Given that the service tax rate was 15% and the GST rate on works contracts is 18%, it is unavoidable that an additional tax burden will be imposed in the GST era.          

Works Contract - Important aspects:

  • The composition Scheme does not apply to Works contracts.
  • For Works Contract, there is no RCM under GST.
  • There has been no notification of TDS applicability.
  • Currently, no abatement or exemption is provided concerning works contract under model law.

Place of Supply of Works Contract

Place of Supply in the works contract under GST would invariably involve immovable property. In light of this, Section 12(3) of the IGST Act, 2017 governs the place of supply in which both the supplier and the receiver are located in India. The place of supply shall serve as the place at which the immovable property is located. If the immovable property is based outside India, but both the supplier and the receiver are located in India, then the supply place would be the recipient's location, which is India. If either the Supplier or the Receiver is situated outside of India, the place of supply shall be the location of the immovable property.

Time of supply of works contract

In the case of services, the Time of Supply is measured as per Sections 13 and 31 of the CGST Act. Section 13 states that the time of supply of service is determined by the earliest of the following:

  • Invoice issue: The invoice is granted by the supplier within the time limit specified in Section 31 or on the date of payment receipt, whichever is sooner
  • Provision of service: In case the invoice is not issued as per the time specified in section 31 or by the date of payment receipt, whichever is relatively early.

Also Read: Goods Transport Agency under GST

Practical works contract guidelines 

Here are the works contract guidelines from the perspective of a Business Entity:

  • The tax code flagging in the applicable accounting package must be changed.
  • To capture claims for ITC cases, the tax code for ITC and non-ITC works must be separated.
  • The Goods and Services Tax Identification Number (GSTIN) must be recorded in the vendor master, and its synchronisation with the Contractor's address must be verified.
  • GSTIN accuracy must be verified through the GST portal (www.gst.gov.in) under “Search Taxpayer Tab.”
  • The GSTIN provided by the party must be displayed in the portal.
  • The invoice issued by the Contractor must be authenticated for all mandatory invoice fields.
  • All contracts involving goods or services linked to immovable property must be brought within the scope of works contracts and viewed as services.
  • Because all GST processes, such as registration, returns, and refunds, are carried out via an IT-enabled platform, contractors must now be familiar with system-driven data management and financing. 

Conclusion

Under GST,  a works contract is considered a supply of services. There were challenges with the tax treatment of works contracts under the previous regime. However, this changed with the implementation of GST. GST aims to end the debate by defining what constitutes a works contract, implying that a works contract includes a supply of service, and specifying a unified rate of tax applicable across India on the same value. As a result of GST, the taxation of works contracts will be simplified and easier to manage. Therefore, we hope through this article we have provided valuable information on how the GST impact works contract.  Follow Khatabook for more useful information. 

FAQs

1. What is the revised rate of GST on works contracts?

For services performed under a Works contract, two GST rates have been established: 18% and 12%. 

GST @ 18%

Construction of a building, civil structure, complex or a portion thereof, along with a complex or facility available for sale to a buyer, in whole or in part. Unless the complete consideration has been obtained after the competent authority has issued a completion certificate or before its initial occupation, whichever comes first.

GST @ 12%

Services provided to the government under a composite supply of works contract. e.g., Construction, commissioning, installation, completion, repair, maintenance, renovation

2. What services are covered under the works contract

The works contract service under GST covers 14 different types of services.

  • Building
  • Construction
  • Fabrication
  • Completion
  • Erection
  • Installation
  • Fitting Out
  • Improvement
  • Modification
  • Repair
  • Maintenance
  • Renovation
  • Alteration
  • Commissioning

3. What is the GST on government works contracts?

The advance ruling authority governed that 12% GST applies to works contract awarded by government authorities.

4. What is the impact of a work contract under GST?

As previously stated, the previous regime had a 60% abatement for new works contract and a 30% abatement for repair works. However, an additional tax burden will be there because the service tax rate is 15%, and the GST rate for works contract is 18%.

5. What is a works contract?

A works contract is a legal agreement to carry out work such as construction, installation, modification, repairs, maintenance, or renovation of any immovable property  in exchange for cash or other useful consideration. A works contract regarding immovable property, for example, would be a subcontract for construction work undertaken by a subcontractor. A composite supply in connection to the moveable property, such as painting or annual maintenance contracts, would also fall under the wide concept of a works contract.

6. What is the GST for civil contractors?

The GST rate for the non-Governmental Works contract services is 18%, while the GST rate for Governmental Works contract services is 12%.

7. What is the GST on government works contract?

The GST on government works contract is 12%.

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