The Taxation of Works Contract was always a subject matter of dispute because both Service and Transfer of Property in Goods were involved in the very same transaction.
In the case of Gannon Dunkerly, the Hon’ble Supreme Court had held that in case of a works contract, the dominant intention of the contract is the execution of works, which is a service and there is no element of sale of goods (as per Sale of Goods Act). The contract being one indivisible contract, it cannot be broken up to levy VAT on sale of goods involved in the execution of works contract. This decision led the Central Government to amend the Constitution of India and insert Article 366(29A) (b) which enabled the State Governments to levy tax (VAT) on transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract.
Before, 101st Amendment to the Constitution of India to levy GST, the Power to Tax on sale of goods was appearing in State List and therefore, state governments were empowered to levy tax on Sale of Goods within the States. Moreover, the power to Levy Taxes was appearing in Clause 92C of the Union List and therefore, Central Government was empowered to levy tax on sale of services. Further, as per clause 29A of the Article 366 of the Constitution defines the term Tax on Sale or Purchase of Goods includes:
“(29A) tax on the sale or purchase of goods includes-
(a) a tax on the transfer, otherwise than in pursuance of a contact, of property in any goods for cash, deferred payment or other valuable consideration;
(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;
(c) a tax on the delivery of goods on hire purchase or any system of payment by instalments;
(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;
(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;
(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;”
Based upon the aforesaid provisions of the Constitution of India, different state VAT Laws have taxed Transfer of Property in Goods involved in the Execution of Works Contract. In most of the State VAT Laws abatements have been prescribed for determining the Value of Goods from the total value of the Works Contract.
In respect of Services also, the Finance Act, 1994, as amended w.e.f 1st July, 2012 in Section 66E dealing with Declared Services, in clause (h) therein, “Service Portion in the Execution of Works Contract” was covered. As per Section 65B of the Amended Finance Act, 1994, the definition of Service includes Declared Services and thereby the Service Tax was leviable on Service Value involved in the execution of works contract. The Valuation of such Service Value involved in the Works Contract was dealt with Service Tax (Determination of Value) Rules, 2006, as amended.
So, from the provisions of the erstwhile Pre-GST Laws, it is clear that Works Contract was leviable to Indirect Tax both under the State VAT Laws and Service Tax Laws. It is pertinent to mention here that in the Pre-GST regime, all types of Works Contracts whether in relation to Movable Property or Immovable Property were covered. The Definition of Works Contract provided in the Finance Act, 1994 ( as amended) is mentioned below for ready reference:
““works contract” means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property”.
The State VAT Laws also contained similar provisions in respect of works contract where transfer in property in goods were taxed.
Post GST Regime
From 1st July, 2017 GST got implemented across the entire nation and erstwhile VAT & Service Tax laws got subsumed in one law i.e GST. The 101st Amendment to Indian Constitution is most relevant here for implementation of GST in India. In Article 366 clause 12A Goods & Service Tax has been defined as under:
“‘(12A) “goods and services tax” means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption;’”
Thus, GST is leviable on –
1. Supply of Goods or
2. Supply of Services or
3. Contracts where both Supply Goods & Supply of Services are involved.
Analyzing the definition, the constitution imposes tax on supply from erstwhile taxable events like manufacture, sale, provision of service etc.
Clause 26A of the Article 366 defines the term Service which means anything other than goods. Such a broad definition of Service widens the Scope of Taxability of Services.
The determination of the taxable event is the backbone of every indirect tax law. It is that event which on its occurrence creates or attracts the liability to tax. In GST following are the charging sections:
|IGST Act, 2017||5(1)||IGST on all Inter State Supplies of Goods or Services or Both except Supply of Alocoholic Liquor for Human Consumption on the Value determined under section 15 of the CGST Act, 2017.|
|CGST Act, 2017||9(1)||CGST on all Intra State Supplies of Goods or Services or Both except Supply of Alocoholic Liquor for Human Consumption on the Value determined under section 15 of the CGST Act, 2017.|
|State SGST Act, 2017||9(1)||SGST on all Intra State Supplies of Goods or Services or Both except Supply of Alocoholic Liquor for Human Consumption on the Value determined under section 15 of the SGST Act, 2017(Same as Section 15 of the CGST Act, 2017).|
|UTGST Act, 2017(Applicable in Union Territories)||7(1)||UTGST on all Intra State Supplies of Goods or Services or Both except Supply of Alocoholic Liquor for Human Consumption on the Value determined under section 15 of the CGST Act, 2017.|
Common Points arising from the Charging Sections
1. GST is chargeable on Supplies
2. Supplies may be of Goods or Services or both
3. Supplies may be either Inter State or Intra State
4. GST is not leviable on Supply of Alocoholic Liquor for Human Consumption
5. Both State Levy(SGST) and Central Levy(CGST) shall be there in case of Intra State Supplies
6. Value of Supply shall be determined under section 15 of the CGST Act, 2017.
Therefore, the Taxable Event generated from the Charging Sections is Supply of Goods or Services or Both. So, we need to understand what is the definition of Supply in GST.
The Supply is a subjective term defined in Section 7 of the CGST Act, 2017 which reads as below:
“7(1) For the purposes of this Act, the expression “supply” includes––
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(b) import of services for a consideration whether or not in the course or furtherance of business;
(c) the activities specified in Schedule I, made or agreed to be made without a consideration; and
(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.”
Supply includes sale, transfer, exchange, barter, license, rental, lease and disposal of all forms of Goods and/or Services. If a person undertakes either of these transactions during the course or furtherance of business for consideration, it will be covered under the meaning of Supply under GST. Supply also includes Import of Services for a Consideration. Further, there are certain activities specified in Schedule I where Consideration is not a prerequisite for treating them as Supply. Further, there are certain activities those are specified in Schedule II either as Supply of Goods or Supply of Services.
The following elements must be present in a transaction to treat it as Supply as emerged from Section 7(1)(a):
√ Supply may of Goods or Services or both
√ Supply is done for Consideration
√ Transaction is done in the course of or furtherance of Business
√ Sale, transfer, barter, exchange, licence, rental, lease or disposal are some examples of Supply
If the aforementioned elements are not met, the transaction should not be considered as a Supply
The definition of goods is provided in Section 2(52) of the CGST Act, 2017 which reads as under:
““goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply”
Therefore, as per the definition, Goods mean Every Kind of Movable Property.
Exclusions: Money & Securities
i. Actionable Claim
ii. Growing Crops
iv. Things attached to or Forming Part of Land
Meaning of services [Sec. 2(102)] As per section 2(102) “services” means
-other than goods, money and securities
-but includes activities relating to the 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;
Consideration [Sec. 2(31)] In relation to the supply of goods or services or both includes—
(a) any payment made or to be made,
a. whether in money or otherwise,
b. in respect of, in response to, or for the inducement of,
c. the supply of goods or services or both,
d. whether by the recipient or
e. by any other person
f. but shall not include any subsidy given by the Central or state Government;
Consideration can be in monetary (Cash or Card, etc.) or non-monetary form (Barter or Exchange)
The term Works Contract is defined in Section 2(119) of the CGST Act, 2017 which reads as under:
““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.”
From the aforesaid definition of works contract, the key features which are coming out of it are as below:
> 14 types contracts are covered in the definition namely contract for-
vii. Fitting Out
> The contract shall be in relation to any Immovable Property
> Transfer of property in Goods shall be involved in the execution of such contract.
Now the next question is what would be the taxability of Contracts in relation to Movable Properties where both supply of goods and supply of services are involved. From definition of Supply provided in the GST Law , it is clear that supply is a subjective term which covers almost everything. In this respect GST Law has introduced two new concepts which were not there in erstwhile indirect tax laws namely i. Composite Supply and ii. Mixed Supply. Let us understand these two concepts first:
Concept of Composite Supply and Mixed Supply
In GST Composite Supply and Mixed Supply are two important concepts that arises when two or more supplies are given together for a single price. The Supplies can be of Supply of Goods or Supply of Services or any combination of Goods and/or services.
Composite Supply is Defined Under Section 2(30) of the CGST Act, 2017
“Composite Supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.
Therefore, in case of composite supply, the following ingredients shall be kept into mind:
√ Two or More Taxable supplies shall be involved in a Transaction
√ Out of which One shall be Principal Supply and the others are ancillary to the Principal Supply
√ Both Principal & Ancillary supplies are Naturally Bundled
√ Both the Principal & Ancillary Supplies are supplied in conjunction in the Ordinary Course of Business
Therefore, the essential yardstick for determining composite supply is whether two or more supplies are naturally bundled or not. They are generally provided together in the normal course of business and inseparable in Nature.
(1) Supply of medicines to IPD Patients for providing healthcare, where principal supply is Providing Healthcare Service to admitted patient and supply of medicine is part & parcel of providing healthcare services. Healthcare Service cannot be provided without providing the Medicine. So, these are natuaraly bundled and therefore, can be termed as Composite Supply.
(2) Where goods are packed and transported by insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply.
Taxability: Composite supply shall be treated as a supply of the principal supply and the rate of GST shall be the rate as applicable to such principal supply.
Section 2(74) of CGST Act 2017, “Mixed Supply” means two or more individual supplies of goods or services, or any combination thereof made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.
Therefore, following elements shall be present in a Mixed Supply-
√ There are two or more individual supplies
√ Any Combination of Goods or Services or both may be there
√ Supplies are made in conjunction with each other
√ A single price is charged for all such supplies.
Examples: (1) Sale of Diwali gift hamper which consists of different Items like sweets, chocolates, cakes, dry fruits packed in one pack is Mixed supply because-
– Each items can be sold individually and
– A Single Price is Charged for the Gift Hamper
Taxability: The Highest Rate of Tax amongst all supplies shall be applied on the total value of mixed supply.
In this respect, the definition of Works Contract in GST Regime may be Examined once again. Section 2(119) of the CGST Act, 2017 defines Works Contract in the following Manner:
“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”.
Works Contract essentially involves two or more supplies because both Supply of Goods and Supply of Services shall be covered to become a transaction as Works Contract. In GST, it is evident from the definition itself that Works Contract shall be in relation to immovable property only and not in relation to Movable Properties. Works Contracts is essentially be a Composite Supply because-
i. Two or more Supplies are involved in it i.e Supply of Goods and Services
ii. Goods & Services are naturally bundled in the ordinary course of business
iii. One supply is the Principal Supply in Nature.
Composite Supply of Works Contract(in relation to immovable property) is categorised as Supply of Services as per Clause 6 of Schedule I of the CGST Act, 2017 and therefore time of supply and place of supply provisions in regard to services shall be applicable in case of works contract.
However, for determining the tax in regard to two or more supplies in relation to any movable property, we need to determine whether the same falls under the definition of Composite Supply or Mixed Supply. If it is a Composite Supply then the Principal Supply needs to be identified on case to case basis and rate of Principal Supply shall be charged on the whole Value of such Composite Supply irrespective of the individual rate of supply. But, if it is mixed supply, then the highest amongst all items shall be applied on the whole transaction value.
Determination Time of Supply and Place of Supply in respect of Works Contract in GST
As per clause 6 of the Schedule II of the CGST Act, 2017 Composite Supply of works contract shall deemed to be a Service and accordingly Time of Supply and Place of Supply provisions shall apply treating the Contract as Supply of Service. We all know that in GST each supply within India can be either Inter-State or Intra-State. The type of levy in each kind of supply are as below:
|Type of Supply||Type of Levy||Condition|
|Intra State||CGST + SGST||Place of Supply and Location of Supplier are in Same State|
|Inter State||IGST||Place of Supply and Location of Supplier are in different States|
As Works Contract is a Deemed Service, therefore, Place of Supply provisions in respect of Supply of Service are most important here. Essentially in GST Works Contract shall be in relation to Immovable Property, and so, Section 12(3) of the IGST Act, 2017 is applicable in such case, if Supplier and receiver both located in India.
|Nature||Place of Supply|
|Immovable property related to services, including hotel accommodation||Location at which the immovable property is located or intended to be located
If Immovable Property is located outside India: location of the recipient
Place of Supply Provisions for Cross-Border Supplies[ Section 13 of the CGST Act, 2017] i.e where either the Location of the Supplier of Service or Recipient of Service is outside India
|Nature||Place of Supply|
|Immovable property-related services, including hotel accommodation||Location at which the immovable property is located|
Valuation of Works Contract
Valuation of a works contract service is dependent upon whether the contract includes transfer of property in land as a part of the works contract. 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 equal to-
Total amount charged for such supply XXX
Less: 1/3rd of Total Amount charged as Value of Land XXX
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.
In case of Works Contracts where transfer of land is not involved, in that case Value for the purpose of charging GST shall be normally taken as Transaction Value which shall be consideration charged for the said service. As per Section 15 of the CGST Act, 2017 the Valuation method can be summarized in the following way:
|If Supplier & Recipient are not Related Person||If Supplier & Recipient are related person|
|Value = Transaction Value i.e the Price Charged from the Customer for selling/providing goods/ services||Open Market value of such supply.|
|If Market Value is not available, then Price Usually charged to an unrelated person supply goods/services of such quality & value.|
Transaction value shall include:
Exclusions from Transaction Value: Discount allowed as normal trade practice and duly recorded in the invoice.
Rate of GST on Works Contract: As works contract is a service as per Schedule II of the CGST Act, 2017, the Notification No. 11/2017- Central Tax( Rate) dated 28th June, 2017, as amended from time to time, dealing with the Rate of GST on Services is Applicable. Readers are advised to follow the said notification to identify the rate of GST on Works Contract.
Input Tax Credits in respect of Works Contract
In GST, the mechanism of availing Input Tax Credit is much wider than the erstwhile indirect tax laws. However, Section 17(5) of the CGST Act, 2017 specifies certain Input Tax Credits the benefit of which cannot be availed. In such Section, clause ( c) and Clause (d) of the said sub-section is most pertinent in respect of works contract. The said two clauses are re-iterated below for ease of reference:
“(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;
(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
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 capitalisation, to the said immovable property”
Analysing the said two clauses, following points emerges:
1. ITC on Works Contract Services in relation to construction of Immovable Property is not available.
2. ITC is also not available on procurement of Goods and/or Services for Contraction of Immovable Property on Own Account
3. ITC is not available only if the same transaction is capitalised in the books of accounts.
4. ITC is however available if the works contract is in relation to Plant & Machinery.
5. ITC is available to Persons whose Output Service is Works Contract Service