Section 2 (119) “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;
- Before the GST, work contract was considered as mixture of goods and service, the goods portion was charged in the local VAT and service was charged in the Service tax, same will be cascading effect on the value of property.
- Construction of building is always work contract.
- The final outcome has to be any immovable property in the work contract, if the outcome is any movable property such as furniture, then same is not covered in the work contractor service.
- Work contract is to be treated as supply of service in the GST as per schedule II of CGST Act in entry No 5(b) and 6(a)
- Construction activity will not qualify as works contract if there is no transfer of property in goods involved i.e. the contractor is supplying service only without any supply of goods.
- Works contract may or may not be a construction. Like there may be activities like installation, fabrication, construction which may qualify as works contract but cannot be covered in the definition of construction.
ITC is blocked in the GST Act in the case of work contract as follows :-
17 (5)(c) works contract services 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;
Explanation.––For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property;
Explanation.––For the purposes of this Chapter and Chapter VI, 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
Input Tax Credit is allowed only when :-
- if the output is also a work contract i.e. sub contractor provides services to the main contractor.
- If the final outcome is plant and machinery in the factory.
Others :-
- A Contract in relation to movable property is considered as composite supply of goods or services depending on the principal supply.
- There is no abetment scheme for the work contract under the GST.
- Work contractor cannot opt for the composition scheme as same is avails only for the supply of goods only, in service only restaurant service is having option for the composition scheme.
- A work contactor has to take normal registration as per the Act.
♦ Palace of supply provision :-
The place of supply provisions under GST laws is very important as it decide which tax is to be levied. (CGST+SGST / IGST).
1) Works Contract under GST would necessarily involve immovable property. In view of the same the place of supply would be governed by Section 12(3) of the IGST Act, 2017, where both the supplier and recipient are located in India. The place of supply would be where the immovable property is located.
1) If the location of work contractor and recipient of the work contract services is in two different state, the supply of services shall be treated as Inter State supply of services and IGST will be charged by provider of work contract service provider.
2) That there is no requirement for a Separate Registration in each state where a Works Contractor is working and he is permitted to make Inter State Supply from the principal state where he is located and registered under GST
AAR Case law for the better clarification :- M/s T & D Electricals – Advance Ruiling No: KAR ADRG 18/2020 dated 31.03.2020
Facts of the case
The applicant is a registered person under Goods & Service Tax Act, 2017 as work contractor and wholesale supplier in Jaipur, Rajasthan. They have been awarded a work contract by M/s Shree Cement Limited, Rajasthan which include complete electrical & instrumentation jobs, installation, testing and commissioning, and IT Jobs at township Karnataka cement project.
The invoices have to be addressed to Karnataka Cement project of M/s Shree Cement Limited.
The applicant does not have any premise in Karnataka as M/s Shree Cement Limited shall provide a temporary small space for office and store in their premise without any written documents as per the contract.
Issue 1: Whether separate registration is required in Karnataka state.
Decision :- the location of supplier is nothing but the principal place of business which is in Rajasthan. Thus there is no requirement to obtain registration in Karnataka.
Issue 2- Question on levy of Intra state tax or Interstate tax if goods is purchased form Rajasthan and supplied to Karnataka.
In this situation, the Supplier i.e. dealer is situated in Rajasthan and recipient of goods i.e. the applicant, both are situated in Rajasthan itself, hence this supply becomes intra state supply by virtue of section 8 of IGST Act. The dealer in Rajasthan has to charge CGST/SGST when the goods purchased by applicant, are shipped to project site in Karnataka under Bill to Ship to transaction in terms of Section 10(1)(b) of IGST Act.
However the applicant has to charge IGST in the invoice addressed to M/s Shree Cement Limited, Karnataka division.
Issue 3: Question on levy of Intra state tax or Interstate tax if goods is purchased form Karnataka and supplied to Rajasthan.
In this situation, the Supplier i.e. dealer is situated in Karnataka recipient of goods i.e. the applicant, is situated in Rajasthan and hence this supply becomes interstate supply by virtue of section 7(1) of IGST Act. The dealer in Karnataka has to charge IGST when the goods purchase by applicant, are shipped to project site in Karnataka under Bill to Ship to transaction in terms of Section 10(1)(b) of IGST Act.
However the applicant has to charge IGST in the invoice addressed to M/s Shree Cement Limited, Karnataka division.
Issue 4: This question related to the documents required to be carried by the transporter of goods to transit/ship material at Karnataka site from Rajasthan supplier and in case, supplier is of Karnataka?
The impugned question does not get covered under the issue on which the advance ruling can be sought under CGST Act 2017, in terms of section 97(2) of said act. Therefore no ruling is given in this issue.
Note:
In terms of section 7(3) of IGST, the supply of service shall be interstate supply where location of supplier and the place of supply are in two different states/union territories.
Further place of supply, in case of work contract service, shall be the location at which immovable property (construction site) is situated as per Section 12(3)(a) of IGST Act.
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