“Change is inevitable – Change is constant” said Benjamin Disraeli. Definitely, this has been proven by GST council by bringing frequent changes in the GST rate of works contract under GST. The legacy of bringing frequent amendments every year has been continued by the Government by making frequent changes in GST rates of works contract under GST. The irony here is that the changes brought in relation to works contract services supplied to the Government has led to more confusion than clarity.
To appreciate the failure of Government, we shall now take note of various changes made in relation to works contract services.
1. Serial no. 3 of the Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 prescribes rate of GST for supply of construction/works contract services. This notification is made effective from 1st July 2017.
2. Notification No. 20/2017-Central Tax (Rate) dated 22.08.2017 brought amendments by inserting item (iii) to item (vi) to Sl. no. 3 of the Notification No. 11/2017-CT(R). Item (iii) covers composite supply of works contract services to Government(s)by way of construction, erection, commissioning etc of historical monument, canals, pipeline for water supply etc.
3. Notification No. 24/2017-Central Tax (Rate) dated 21.09.2017 has brought amendments by inserting item (vi) to item (vii) to Sl. no. 3 of the Notification No. 11/2017-CT(R). Item (vi) covers composite supply of works contract services to Government(s) by way of construction, erection, commissioning etc of civil structure/original works for use other than for commerce, industry etc and structures meant predominantly for use as educational, clinical or art or cultural establishment.
4. Notification No. 31/2017-Central Tax (Rate) dated 13.10.2017 has brought amendments by making changes in relation to item (iii) and item (vi) and has inserted item (vii) to item (ix) to Sl. no. 3 of the Notification No. 11/2017-CT(R).
5. Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017 has brought amendments by making changes in relation to item (vi) of Sl. no. 3 of the Notification No. 11/2017-CT(R).
6. Notification No. 1/2018-Central Tax (Rate) dated 25.01.2018 has brought amendments to by inserting item (ix) to item (xii) to Sl. no. 3 of the Notification No. 11/2017-CT(R). Item (ix) covers composite supply of works contract services by Sub-contractors to main contractors who supply works contract services mentioned in items (iii) & (vi) respectively.
Items (iii) & (vi) deals with composite supply of works contract services provided by contractors to the Government(s), whereas amendments through item (ix) deals with composite supply of works contract services provided by sub-contractors to main contractors providing composite supply of works contract services to the Government(s).
Let us analyze the amendments with the help of an example. ABC Ltd (Telangana) is a company engaged in construction business, has been awarded a contract by the Central Government to construct a Canal/Dam in Andhra Pradesh. ABC Ltd has incorporated a special purpose vehicle i.e. X Ltd (in Andhra Pradesh) to undertake the entire work viz., X Ltd is the main contractor providing works contract services to Government(s). X Ltd has now sub-contracted a portion of work to a sub-contractor i.e. Y Ltd. Y Ltd further sub-contracted a portion of work to Z Ltd.
In the erstwhile service tax regime, Serial nos. 12 & 12A of the Notification No. 25/2012-Service Tax dated 20.06.2012 provided exemption in respect of works contract services provided to Government. The nature of works exempted under this mega exemption notification was similar to the nature of works enumerated under item (iii) & (vi) explained above.
Further, Sl. no. 29(h) of the Notification No. 25/2012-ST provided exemption from service tax for services by the sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempted from service tax. Further, contractors were liable to pay VAT in respect of the material portion involved in execution of works contract. Also, the credit of taxes paid for inputs, capital goods etc used in providing works contract services were not eligible as input tax credit under the erstwhile tax regime. However, under GST, the credit of GST paid on inputs, capital goods etc. used in making outward supplies are eligible as input tax credit.
Prior to amendment by Notification No. 1/2018-CT(R), the sub-contractors (Y Ltd) supplying works contract services to the main contractors (X Ltd/R Ltd) were only covered under residual entry viz., item (ix) which suffers GST at the rate of 18%.
Item (iii) & (vi) inserted vide Notification No. 20/2017-CT(R) and Notification No. 24/2017-CT(R) respectively to tax the works contract supplies relating to Government works at the rate of 12% instead of 18%. The intention behind amendment made by Notification No. 1/2018-CT(R) could be to put the sub-contractors (Y Ltd) in a beneficial position as the services provided by them were exempted from service tax where the works contract services by main contractor (X Ltd/R Ltd) were exempt. The mere reduction of rate from 18% to 12% could be on the reason due to increased ITC under GST regime and to compensate the VAT paid earlier.
However, the above amendments in relation to sub-contractors appear to be not fulfilling the intention of the Government to keep the sub-contractors in a beneficial position as they stood in the erstwhile tax regime.
The amendment provides benefit of 12% rate only towards works contract service supplied by sub-contractor (Y Ltd) to main contractor (X Ltd) supplying works contract services to the Government(s) whereas the erstwhile regime had provided exemption even in respect of sub-sub-contractors (Z Ltd) providing works contract services to the sub-contractor (Y Ltd) who was providing exempt works contract services. It appears from the literal interpretation of the law that the composite supply of works contract services by sub-sub-contractors (Z Ltd) to sub-contractors (Y Ltd) in relation to Government works do not fall within this entry and hence, will fall within residual item viz., item (xii) which suffers GST at the rate of 18%.
Though the above conclusion can be reached with ease, it can be perceived through amendments that the Government has intended to bring similar benefit to sub-contractors as provided under the erstwhile tax regime. This perception is clear by inserting item (iii) & (vi) at a reduced rate of 12% akin to Sl. no’s. 12 & 12A which exempted the said services from service tax. Based on this perception (viz., similar entry as in Sl. no. 29(h) is to be inserted in GST), it can be argued that even the sub-sub-contractors (Z Ltd) supplying works contract services to sub-contractor (Y Ltd) who are supplying works contract services to other contractor (X Ltd) in relation to Government works, can be covered under item (ix) and can suffer GST at the rate of 12%.
One more peculiar issue for the sub-contractors is utilization of input tax credit. It might happen that the sub-contractors shall undertake the work and register in a different State (e.g. Andhra Pradesh) from the State where he held his registration (e.g. Telangana). The procurements by sub-contractor supplying works contract services to Government may suffer higher GST (say 18%) whereas the outward supplies may suffer lower GST (12% in this case). This would result in blockage of input tax credit and inability to utilise the input tax credit as there would be no other output tax liabilities for the sub-contractor in the other State (viz., Andhra Pradesh). Further, accumulated credit cannot be claimed as refund by sub-contractor as it is not treated as inverted duty structure. Therefore, though GST provides more input tax credit compared to the erstwhile regime, the benefit does not materialize to the sub-contractors and the mere reduced rates cannot be said to be a material benefits provided to the sub-contractors.
Therefore, considering entire ambiguity and debatable scope of reduced rates, the Government needs to make its intention clear through further amendments.
Further, there are many concerns raised by the contractors as regards period of applicability of 12% GST rate in respect of supply of works contract services to Government(s). The insertion of item (iii) and item (vi) are done by way of exercising of the powers conferred by Section 9(1), Section 11(1), Section 15(5) and Section 16(1) of the Central Goods and Services Tax Act, 2017. On combined reading of the said sections, it appears that the amendments would be effective from such date as may be specified in such notification. However, the insertion of items/entries are done by way of substitution to the entries specified in the earlier notifications and these notifications do not specifically provide the effective date of application of amendments.
In this connection, reliance can be placed on the judgement given by the Hon’ble Supreme Court in case of Vijayalakshmi Rice Mills, New Contractors Co. and others. vs. State of Andhra Pradesh explaining the effect of the word “substitute” appearing in an amendment act wherein it is held as under: –
“It is no doubt true that the literal meaning of the word “substitute” is “to replace’ but the question before us is from which date the substitution or replacement of the new Schedule took effect. There is no deeming clause or some such provision in the Rice (Andhra Pradesh) Price Control (Third Amendment) order, 1964 to indicate that it was intended to have a retrospective effect. It is a well-recognized rule of interpretation that in the absence of express words or appropriate language from which retrospectivity, may be inferred, a notification takes effect from the date it is issued and not from any prior date. The principle is also well settled that statutes should not be construed so as to create new disabilities or obligations or impose new duties in respect of transactions which were complete at the time the Amending Act came into force.”
Therefore, on combined perusal of the ambiguity in the amendments regarding effective date of application and the above judgement, it appears that insertion of items (iii) & (vi) are effective only from the date of issuance of such notifications and the GST rate of 12% is applicable only from 22.08.2017 and 21.09.2017 respectively for works specified in item (iii) & (vi) respectively, and not from the 01.07.2017. The same understanding can also be drawn in case of item (ix) inserted by Notification No. 1/2018- CT(R) dated 25.01.2018. Therefore, the reduced GST rate for sub-contractors appears to be applicable only from 25.01.2018 and not from the date of connecting notification inserting items (iii) & (vi) viz., 22.08.2017 and 21.09.2017 respectively. This may not please the construction industry.
To summarize, the changes brought in by various amendments in respect of supply of works contract services by sub-contractors, appears to be not meeting the intention of Government to keep the sub-contractors in the status-quo as they stood in the erstwhile tax regime. The tax payers may argue out that the intention prevails over the ambiguous language of the law and may take the benefit of reduced rates even in case of chain below the sub-contractors.
Further, the tax payers may argue and take the benefit of these amendments from earliest notification date as the Government has brought the amendments by way of substitution which shows the intention of Government and failure on part of Government to have brought and included the changes in the earliest notifications itself.
Thus, the ambiguity, intention, scope and time of application of reduced rates, have created confusion which leads to litigation between the tax payers and tax department and are to be decided by the Courts. As said in the beginning, the Government has proved the saying ‘change is inevitable’, it is now the duty of courts and matter of time to prove the saying ‘change is constant’ in the changes brought by the Government(s).
1 Vijayalakshmi Rice Mills, New Contractors Co. and others. vs. State of Andhra Pradesh [(1976) 3 Supreme Court Cases 37]
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