Accounting and GST in Construction Work Contract

♣ What is Work contract

Work contract is an agreement in which involve supply of goods as well as services. This agreement contractor (supplier) execute activity relating building construction, manufacturing, processing, erection, installation, repair, commissioning of any movable or immovable property for consideration.

Work contract has been define in sec 2(119) of CGST Act 2017

“work 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.”

♣ Work Contract is supply of Goods or Service

This is very essential to understand that Work contract is supply of service or goods for the purpose of classification. Sec 2(52) “Goods means every kind of movable property other than money and security but include actionable claim, growing crops, grass and things attach to or forming part of land which are agreed to be served before supply or under contract of supply”.

Sec 2(102) Services means anything other than goods, money and securities but includes activity relating to use of money or its conversion by cash or by any other mode from one form, currency or denomination, to another form , currency or denomination for which a separate consideration is charged.

However Schedule II para 6(a) clearly states that Work contract define U/S 2(119) is Composite supply of service. Hence there is a clear demarcation of a Work contract is a supply of service.

♣ Supply under Work Contract

Since GST is applicable for Work Contract so Time of supply is very crucial to identify that when GST is liveable.

As per sec 31 (5) in case of continuous supply of service

1. Where the due date of payment is ascertainable from the contract, the invoice shall be issued on or before due date of payment

2. Where the due date of payment is not ascertainable from the contract, the invoice shall be issued before or at the time of supplier of service receive payment.

3. Payment is linked to the completion of an event, the invoice shall be issue on or before the date of completion of that event.

Due to nature of civil construction Work it may take 2 to 5 years or even 10 years also. In that case the concept of Running Account Bill is come into picture. In this Contractor submit first Running Account (RA) Bill. This RA Bill approve by contactee either full or part of the R A Bill. Than the Contractor (Supplier) raise the TAX INVOICE under GST as per the agreed RA bill.

♣ Revenue Recognition by Contractor

For the purpose of revenue recognition there is two methods are mostly used.

• On the basis of Tax Invoice issued by the Contractor (Supplier) the revenue related to these bill are recognise by contractor in his books.
• The other major revenue recognition method in case of civil construction contract is Percentage of completion method (POCM). This method is also govern by Accounting Standard (AS) 7 issued by ICAI which corresponds to the ICDS III

♣ Input tax credit for Work contract under GST

As per sec 16 (1) of CGST Act , Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

However as per Section 17(5)(c) of CGST Act 2017 input tax credit in respect of Work contract services has been restricted to the recipient when supplied for the construction of an immovable property (other than plant and machinery)except where it is a input service for further supply of Work contract service .Thus, ITC for Work 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 Work contract service.

For example a building developer may engage services of a subcontractor for certain portion of the whole Work. The subcontractor will charge GST in the tax invoice raised on 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 Work contract service.

When Immovable property (Building) is not Capitalised in the books of the recipient

As per Explanation given in Section 17(5)(c)expression “construction” includes reconstruction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property If any Work contract services has been used by recipient which has not been capitalized by the recipient for the said immovable property credit of the same may be availed by the recipient subject to other conditions of section 16(1).

♣ Valuation under Work Contract Service

Valuation of Work contract service is depend upon whether the contract include transfer of property in land as part of the Work contract.

As per Notification no 11/2017 CGST (rate) In case of supply of service, involving transfer of property in land or undivided share of land, as the case may be, the value of supply of service and goods portion in such supply shall be equivalent to the total amount charged for such supply less the value of land or undivided share of land, as the case may be, and the value 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,-

(a) consideration charged for aforesaid service; and

(b) amount charged for transfer of land or undivided share of land, as the case may be

For example if a builder is selling flats in which payment is collected in staggered manner the same is taxable as a Work contract service. Selling of flats includes inherent cost of land also .So suppose payment received by builder as first instalment is 45,00,000 GST will be liveable at applicable rate on 45,00,000*2/3 =30,00,000 and balance will be construed as cost of land on which no GST is liveable .

♣ Whether project wise GST Registration is required within same state.

Section 25 of the CGST Act, 2017 contains the registration provisions and as per section 25 (2) of the CGST Act, 2017 the person shall be granted a single registration in a State or Union territory.

The proviso to section 25 (2), however, deals with the registration provision in case of the person who is having different units in the same State or Union territory. As per Rule 11 the registered person having multiple places of business within a State or a Union territory shall be granted a separate registration other condition satisfied.

♣ Transfer of input tax credit on obtaining separate registration for multiple places of business within a state or a union territory –

New rule 41A has been inserted into the Central Goods and Service Tax Rules, 2017, vide the Central Goods and Service Tax (Amendment) Rules, 2019 effective from 1 February, 2019, which deals with the provisions relating to the transfer of input tax credit in case of the registered person who has obtained a separate registration for the multiple places of business within a State or Union Territory.

Rule 41a is applicable to –

A registered person who has obtained a separate registration for multiple places of business and intends to transfer the unutilized input tax credit lying in electronic credit ledger to the new registered unit; action to be taken by the registered person for transferring the input tax credit to the new registered unit –

The registered person is required to furnish details in FORM GST ITC-02A with in a period of 30 days from the date of obtaining separate registration. FORM GST ITC-02A can be submitted either electronically through the common portal.

Calculation of input tax credit to be transferred to new registered unit –

The input tax credit can be transferred to the new registered unit in the ratio of the value of an asset which is being held by it at the time of obtaining the registration.

Once the application in FORM GST ITC-02A is filed by the registered person, the new registered unit is required to accept the details and upon acceptance the input tax credit balance as specified in FORM GST ITC-02A would be credited to the electronic credit ledger of the new registered unit.

♣ Stock and Stock Transfer between the units having different GSTN in the same state

Under GST regime the stock Transfer is to different GSTN on the same PAN is considered as supply. As per Schedule I (2) “supply of goods or services or both between related person or distinct personas specified in section 25 when in the course or furtherance of business shall be treated as supply” So in this case Tax Invoice should be issued instead of Delivery Challan .

Valuation of goods in case of Stock Transfer to Distinct Person

The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall- be the open market value of such supply;

(b) if the open market value is not available, be the value of supply of goods or services of like kind and quality;

(c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order:

Maintenance of Stock Register

Due to Nature of business stock register maintain is very difficult. But the requirement of section 35 of central GST Act 2017 read with rule 56 of central GST rule 2017 as well as under Income Tax Act 196, If the sale/turnover from the business is more than Rs. 25,00,000 in any of the 3 preceding years, then books of accounts will be compulsorily maintained.

Consequences of non-maintenance of stock under GST

If the taxpayer fails to maintain proper records in respect of goods/services, then the proper officer shall determine the amount of tax payable on the goods or services or both that are not accounted for, as if such goods or services or both had been supplied by such person and the provisions of Section 73 or Section 74, as the case may be, shall, mutatis mutandis, apply for determination of such tax.