prpri Definition of Works Contract under CGST Act,2017 is Unconstitutional Definition of Works Contract in Section 2(119) of CGST Act, 2017 is Unconstitutional



1.1. Prior to the 46th amendment of the Constitution in 1982, which introduced Article 366(29A) into it, The States and the Centre had no power to tax WORKS CONTRACTS, that is, contracts for WORK, which involved use of GOODS [ which were incorporated in the Work], through the State sales Tax and the Central sales tax Acts.

1.1.1. This was because, Works Contracts are contracts for SERVICE [ like maintenance or repairs, supply, erection & commissioning contracts etc.

1.2. Till the year 1994, when Tax on Services were introduced , giving jurisdiction to tax services to the Centre alone, there was no indirect tax on Services.

1.3. Article 366(29A) “corrected” this deficiency through six sub-clauses (a) to (f), of which we will talk only about sub -clause (b) which reads as follows:–

(29A) “tax on the sale or purchase of goods” includes-

(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;

1.4. Following this, all the States started charging tax on the “value of goods” deemed to have been SOLD in a works contract.

1.4.1. The method of determining this value was hugely complex, since the works contract price was composite and there was no price break up in it between goods and services. This to litigations and land mark judgments by the SC  for determining the value of goods to be taxed by the State and central Sales Tax Acts and later by the State VAT Acts.

1.4.2. To skip this complex method of valuation, all the States and the Centre introduced “deemed value” for  goods used in the works contracts by assigning different percentages of the total value of the works contracts  for different categories of contracts.

1.5. When Service Tax was introduced through the Finance Act,1994, the Centre started charging service tax , again , on the “deemed” value of  the service element involved in a  works contract.

1.5.1. Thus, from  1994, both the Centre and the States started charging service tax, Central Sales Tax and State VAT on a works contract!

1.5.2. Ironically, in the scramble to raise revenue, both the Centre and the States started fixing the value of services and goods involved in a works contract at 70% or more, depending on the category of the contract!


2.1. When the GST came into existence at last w.e.f 01.07.2017, thorough the 101st Amendment Act of the Constitution and passing the GST Acts, after years of consensus building efforts between the Centre and the States,  SURPRISINGLY, the term “Works Contract” was given a RESTRICTED definition , in Section 2(119) of the CGST Act,2017, confining it ONLY TO contracts in respect of IMMOVABLE PROPERTY !

2.2. This naturally rendered the works contracts in respect of movable goods non-taxable!

2.3. To set this aberration “right”, a new expression called ” COMPOSITE SUPPLY” was invented and put on the statute book through Section 2(30) of the CGST Act ,2017.

2.4. Let us now read this Section:–

” Composite Supply” MENAS a supply made by a taxable person to a recipient consisting of,—

2.4.1. two or more taxable supplies of GOODS or SERVICES or BOTH,

2.4.2. or any COMBINATION thereof,

2.4.3. which are NATURALLY BUNDLED, and

2.4.4. supplied IN CONJUNCTION with each other,


2.4.6. one of which is a PRINCIPAL SUPPLY

2.4.7. The Act goes on to define the newly invented term “the PRINCIPAL SUPPLY thus, in Section 2(90):–

” principal Supply MEANS, the supply of goods OR services, which constitutes the PREDOMINANT ELEMENT of a Composite Supply [ as defined in Section 2(30) given above)], and to which any other supply forming part of that composite supply is ANCILLARY.

2.5. We will now examine how this “remedy” to set right the blunder committed  by restricting the definition of Works Contract to contracts in respect of IMMOVABLE property ALONE in Section 2(119)given above is worse than the disease:–

2.5.1. Who will decide whether the supply of goods or services or both are “NATURALLY BUNDLED”? The contracting parties ? The universal practice followed in the industry  and in the market place ? and if yes, how will anyone IDENTIFY and VALIDATE such a practice? The Jurisdictional Department Officer who has no expertise in grasping the nuances of a myriad variety of businesses , contracts and market practices? The similarly placed Audit Officer ? Again, the similarly placed Enforcement Officer ?

2.5.2. Who will decide whether the goods or services or both are bundled in conjunction with each other IN THE ORDINARY COURSE OF BUSINESS ? The  Revenue Officers mentioned above ?

2.6. The issue has serious  tax implications and, with the Revenue ALWAYS taking a pro-revenue stand, even if they honestly believe it to be wrong, lakhs of business entities, especially in the SME Sector with precious little financial resources will be dumped in the gallows of endless litigation purely due to INTERPRETATIONAL ARBITRARINESS of the revenue authorities.

2.7. Worse, they will be slapped with huge tax demands in case the Revenue feels that the law is wrongly interpreted, and will have to pay the tax demanded in excess of what has been charged in their Tax Invoices, collected and paid off to the Govt, from their own pocket, since no customer is going to accept and pay any additional tax than the amount charged in the invoice, just because the Taxman wants it!

2.7.1. If this happens, several of them will become bankrupt and will be wiped out of the business.

2.8. Let me give you one concrete example of this where the taxman has taken away the incentive given by his own Govt and his boss, the Finance Ministry, to encourage the production of SOLAR POWER.

2.8.1. The central Govt , through the GST Acts, charges a nominal rate of 5% on the supply of Solar Power Equipments in order to encourage power production from non polluting and renewable sources to save all of us from disease and death caused by power produced from coal. A laudable social objective.

2.8.2. Now, the market practice here is that the supplier not only supplies the solar power equipment [goods] but also supplies the service of installing and commissioning it.

2.8.3. Thus it becomes a COMPOSITE SUPPLY with a single price.

2.8.4. The value of the equipment comes to  as high as 90% of the total price but since the intention of the contracting parties is not mere supply of the equipment [goods] but to get this installed and commissioned, the SERVICE of installing and commissioning becomes the PRINCIPAL SUPPLY as per Section 2(90) .

2.8.5. This service attracts tax at 18% and so the buyer ends up paying 18% GST on the total price for the contract, of which the equipment costs 90% .

2.9. So what happens to the much advertised incentivised tax rate of just 5% on the supply of solar power equipment ? Who cares?

2.10. Thus, because of the restricted and constricted definition of the term “works contract”, which militates against the Constitutional definition of the term in Article 366(29A),  WE, AS A NATION, HAS SCORED A SELF GOAL by defeating the well meaning tax incentive given by the Govt by its own arbitrary and unconstitutional stand taken in the tax domain!

2.11. Scores of suppliers who, in good faith categorised this as a “composite supply of goods” and charged only 5% on the total value of the contract have now come to grief and huge loss, with the  the Advance Ruling Authority [AAR],of many States, which is comprised of Departmental Officers confirming that these are composite supply of SERVICE and thus the demand of  18% tax by the revenue.

2.12. Apart from this, this term “composite supply” is also susceptible to MISCHEVOUS interpretation by the Revenue, when the supplier identifies the supply of goods or service as the PRINCIPAL SUPPLY in the  composite contract as per the universally accepted market practice,  but the Revenue Officer pitches for an exactly opposite identification of what the PRINCIPAL SUPPLY is, purely for the reason that the one  so identified by him HAS A HIGHER RATE OF TAX!


3.1. Exactly when  the elected Government, respecting the people’s sovereignty in a democracy, swears and promises a LITIGATION FREE TAX REGIME to pull the nation out of the self defeating litigation nightmare we have been living through for decades,  the Govt, thorough its un-empowered employee officers, has thrust millions of avoidable litigations which have retarded our growth irreparably and made us a cynical , paranoid, confused and STRANDED nation!

3.2. No costs or penalties are imposed on the officers or the Govt for indulging in patently frivolous litigation AGAIN and AGAIN on even the issues settled by the Supreme Court!!!


4.1. I wish the SC took suo moto note of this grievous anomaly highlighted in the matter above and set the law right at the earliest.

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Qualification: Post Graduate
Location: CHENNAI, Tamil Nadu, IN
Member Since: 30 Oct 2017 | Total Posts: 3

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August 2021