March 27, 2023

GST on Work Contracts

A works contract means a contract that involves both supplies of goods and supply of services such as a construction contract wherein the material is supplied along with service. Other examples of works contract service on completion, erection, installation, fitting, renovation, etc.

In the pre-GST regime, works contracts have always been a matter of litigation since service tax was payable on service components to the Central Government and VAT was payable to the material government to the state government. The dispute was always about the value of services and goods in the contract.

However, GST has put an end to most of such issues and made taxes on works contracts more simplified. In this article, a detailed discussion is carried on the applicability of GST on works contracts.

1. What is a work contract

The Works Contract has been defined in Section 2(119) of the CGST Act, 2017 as “works contract” means a contract for building, construction, fabrication, erection, completion, construction, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property involving the transfer of property in goods; (whether in the form of goods or in any other form) involved in the performance of such contract.”
In the pre-GST regime, works contracts could be carried out with respect to both movable property and immovable property.
However, under the GST regime, works contracts are restricted to contracts for immovable property only.
Therefore, Any contract for the supply of both goods and services with respect to movable property, such as painting a workshop, will not qualify as a works contract. Such supply will be taxed as composite supply under GST.

2. Whether a work contract is a supply of goods or a supply of service

Schedule II of the CGST Act, 2017 contains a list of activities that are either classified as the supply of goods or the supply of services.
As per entry No. 6(a) of Schedule II of CGST Act, 2017, the works contract as defined in clause (119) of section 2 shall be considered as a supply of service.
Further, as per Entry No. 5(b) of Schedule II of CGST Act, 2017, construction of a complex, building, civil structure or a part thereof, except where the entire consideration is received after issuance of the completion certificate, shall be considered as supply of service.
Therefore, works contract shall be considered as a supply of service.

3. Input Tax Credit of works contract

Section 17 of CGST Act specifies situations where proportionate ITC is available or where ITC is ineligible.
As per Section 17 (5)(c) of CGST Act, the Input tax credit will not be available on works contract services when supplied for the construction of an immovable property (other than plant and machinery).
However, ITC shall be allowed if such input service is used for further supply of works contract service.
Therefore, in cases where construction service is obtained by a builder from a sub-contractor then such builder is entitled to take ITC of works contract service as such service is used for further supply of works contract service.
However, if a company takes the services of a builder for the construction of his office premises then even if such premises is used for further supply of goods and services, the company is not entitled to take ITC of works contract service.
Expression “Construction” includes re-construction, renovation, additions or alterations, or repairs, to the extent of capitalization, to the said immovable property.
Further, ITC can be claimed with respect to the construction of plants and machinery.
the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes-
- the land, building, or any other civil structures;
- telecommunication towers; and
- pipelines laid outside the factory premises.

4. Working model for works contract under GST

Supplier of Service	Nature of Service	Classification	Recipient of Service	Whether entitled to take ITC or not
Sub-contractor	Construction of Corporate Office	Works Contract – Supply of service	Contractor	Eligible to take ITC
Contractor	Construction of Corporate Office	Works Contract – Supply of service	Company	Not eligible to take ITC
Contractor	Construction of foundation of Plant & Machinery	Works Contract – Supply of service	Company	Eligible to take ITC

5. Place of Supply of Works Contracts

Place of supply plays a vital role under GST as it determines the nature of the transaction, i.e., inter-state supply liable to IGST or intra-state supply liable to CGST & SGST.
Place of supply provisions are divided into 2 parts one is where both supplier and recipient are located in India and second where either supplier or recipient is located outside India.

Where both supplier and recipient are located in India:
- Section 12(3) of the IGST Act deals with a place of supply for services related to immovable property.
- As per Section 12(3) of the IGST Act, for any services provided for carrying out construction work directly related to immovable property such as construction work, the place of supply shall be the location of immovable property.
- Therefore, If the contractor is located in Delhi and the Factory building is getting constructed in Uttar Pradesh then the place of supply for construction service will be Uttar Pradesh and such transaction will qualify as inter-state supply and will be liable to IGST.
- Further, If immovable property is located outside India and both the supplier and the recipient are located in India, then the place of supply shall be the location of the recipient.

Where either of supplier or recipient are located in India
- As per Section 13(4) of the IGST Act, 2017, When either Supplier or Recipient is located outside India, for services related to immovable property, the place of supply will be the place where the immovable property is located or planned to be located.

6. Valuation of works contract under GST

Provisions related to valuation are given under Section 15 of the CGST Act, 2017.
As per common principle, the value of a supply of goods or services shall be the transaction value, which is the price actually paid or payable for such supply where the supplier and the recipient are not related and the price is the sole consideration for the supply.
However, in the case of a works contract, valuation depends on whether consideration includes the value of the land transferred.
Supply of Goods and materials under a construction contract is chargeable to GST. However, the supply of land is outside the GST ambit. Therefore, if consideration involves the value of land same should be excluded for computing GST.
As per Notification 11/2017 dated 28th June 2017, In case the supply of construction service involves the transfer of property in land or an undivided portion of land, the value of the service and goods for computing GST shall be equal to the full amount charged for the supply less the value of the land/undivided portion of the land.
Value of such transfer of land or undivided share of land, as the case may be, in such supply shall be deemed to be one-third of the total amount charged for such supply.
Explanation. – For the above purpose, “total amount” means the sum total of,-

Consideration charged for aforesaid service; and
The amount charged for transfer of land or undivided share of land, as the case may be

Example

Consideration received: INR 60,00,000

Value of Land: INR 20,00,000 (1/3rd of Total amount charged)

Taxable Value: INR 40,00,000

7. Books of Accounts required to maintain for the person providing works contract service

As per Rule 56 (14) of the CGST Rules, 2017, every registered person executing a works contract shall maintain separate accounts for works contracts showing the following –

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

8. Deductions or exemptions on works contract service under GST

In the pre-GST regime, on consideration received for works contract service, service tax was payable to the central government on the service component and VAT was payable to the State government on the goods component.
Since consideration involves both value of goods and services, therefore, certain deductions were provided under both laws to reduce the value pertaining to another. Such as under Service Tax, a standard deduction was available of 60% on original work on account of the supply of goods and a standard deduction of 30% was available on repair & maintenance work.
However, under GST, since the entire supply is considered a supply of service, therefore, the law does not provide any ad-hoc exemption.
However, if consideration includes the value of land, a deduction of 1/3rd is available on account of land.

9. Availability of Composition Scheme to Works Contractors

Earlier, the composition scheme was not available to service providers and was open to only available to suppliers of goods. However, with effect from April 2019, the benefit of the Composition scheme has been extended too service providers as well provided turnover is up to Rs.50 lakhs.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

ITC is ineligible in relation to construction work of immovable property which is further let out

The Company constructed a warehouse and let it out. The Company paid the GST on such outward supply. The Company sought an advance ruling from WBAAR that whether the company is entitled to claim ITC on inward supplies received for construction of such warehouse. The Hon’ble WBAAR held that the restriction given under Section 17(5)(d) of CGST Act in respect of ITC on goods or services used for construction of warehouse is applicable in the instant case, i.e., the Company is not eligible for ITC with respect to inward supplies to the extent such expenditure is capitalised. However, where construction expenses are not capitalized in books, the claim of ITC is admissible.

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