Most of the government works contract comes under the slab rate of 12%. But GST rate on Government Sub contract is still widely debated in the Infrastructure sector since the notification governing tax rates is unclear.
What GST Law Says?
As per Sl no 3, clause (ix) of Notification 11/2017-Central Tax (rate) dt 28.06.2017 as amended upto 25.01.2018, works contract service provided by a sub-contractor to the main contractor providing services in relation to construction of canal, dam or other irrigation works etc comes under slab rate of 12%.
|Sl No.||Heading (HSN Code)||Clause||Description of Service||Effective tax rate (percent.)|
|3||Heading 9954 (Construction services)||(ix)||Composite supply of Works contract provided by a sub-contractor to the main contractor providing services specified in clause (iii) or clause (vi) above to Central government, State Government, union territory, a local authority, a governmental Authority or a Government entity||12%|
|Heading 9954 (Construction services)||(iii)||Composite supply of works contract as supplied to the Central government, State Government, union territory, a local authority, a governmental Authority or a Government entity by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of, –
(a) a historical monument, archaeological site
(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.
|Heading 9954 (Construction services)||(vi)||Composite supply of works contracts as supplied to the Central government, State Government, union territory, a local authority, a governmental Authority or a Government entity by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of, –
a) Civil structure or any other original works for other than commerce or business
b) A structure meant for use as educational, clinical, art or cultural establishment
c) A residential complex for self-use or use of their employees
It is clear from the above that if main contractor is awarded works contract for construction of canal, dam, irrigation works, pipeline etc (covers everything mentioned in clause (iii) or (vi)), only then Sub contractor comes under the slab rate of 12% and for others works sub-contractors have to pay 18% (other than earthwork mentioned in clause (vii)). It is important to note, construction of roads was mentioned in clause (iv) of the notification. So subcontract for construction of roads comes under 18% slab. But decisions given by GST Authority for Advance ruling suggests otherwise.
The Authority for Advance Rulings, Uttarakhand NHPC Ltd , Ruling no 17/2018-19, Dated Jan 30,2019, The Authority wordings were reproduced below
“I observe that the purpose or object of the GST Council is to extend benefit to the last chain of said supply and reason for the same is to provide equal opportunities and equal level playing fields to business entities and avoid discrimination. Thus I am of the view that the recommendations made by the GST Council in this regard makes it clear that if GST rate on the work contract is 12% or 5% then sub-contractor is also liable to discharge his GST liability @ 12% or 5% as the case may be. Similarly if GST rate on the said work contract is exempted or 0%, then supply of service in the form of work contract by the sub-contractors will also come in the purview of exempted or 0%. Thus I observe that if the principal contractor is providing an exempt work contract service to Government in terms of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 (as amended from time to time) and in such case it work contract is partially or wholly sub-contracted then the sub-contractors would also be exempted from payment of GST.”
The Authority for Advance Rulings, Maharastra, Shree Construction order no 09/2018-19/B-65 dt 11.07.2018, the Authority wordings are
“Even though, we being sub-contractor providing civil construction services to main contractor effecting original works contract for Railways which is not covered in 9954 (ix) and 9954 (x), we believe that the rate applicable to us. is 12% only which is the rate applicable for 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 (including substituted from 25/01/2018) monorail and metro”
Though construction of Railways is covered under clause (v), The AAR accepted for 12% slab rate for the sub-contractor.
If we go by the intention of the act and above 2 advance rulings, it is possible for the sub-contractors to charge 12% to the main contractors if the main contractor is covered under 12% slab rate. But it is prone to litigation. My suggestion is take expert advice from your Auditor or me before deciding on tax rate.