As per Black’s Law dictionary contractor have been defined as one who contracts to do work or provide supplies for another competent contractor. A contractor who has the knowledge, skill, experience, and available equipment to do the work that he is employed to do without creating an unreasonable risk of injury to others and who has the personal characteristics necessary to carry out the work and sub-contractor is one who is awarded a portion of an existing contract by a contractor, specially a general contractor.
Understanding relevant provisions of the GST Act
Definition of ‘works contract’ have been defined under section 2(119) of the CGST Act, 2017 which has been extracted below for reference:
“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”
Further, clause 5(b) and clause 6(a) of Schedule II of the CGST Act, 2017 clarifies works contract to be treated as supply of service.
To make it simpler it can be said that a works contract is essentially a contract of service which may also involve supply of goods in the execution of the contract. It is basically a composite supply of both services and goods, with the service element being dominant in the contract between parties.
Services supplied under works contract are taxed under Heading 9954 at 12%/18%.
Pure Labour Services in GST:
Pure labour contract means supplier of service should not utilize any material in supplying the service. It should be a labour contract only.
The rate of tax in case of pure labour services shall be 18% [Entry (xii) to serial number 3 of Notification No. 11/2017 – Central Tax (Rate) dated 28th June 2017, as amended], except in the case of exemptions provided in Notification No. 12/2017 briefed hereunder.
Notification no. 12/2017-Central Tax (Rate) dated 28th June, 2017, exempts the following services of ‘pure labour contract’ from GST-
1. Services of construction / erection / commissioning / installation / completion / fitting out / repair / maintenance / renovation or alteration of a civil structure or any other original works pertaining to the beneficiary led individual house construction or enhancement under the housing for all (urban) mission or Pradhan Mantri Awas Yojana (Entry 10).
2. Services of construction / erection / commissioning or installation of original works pertaining to a ‘single residential unit’otherwise than as a part of a residential complex (Entry 11).
“original works means all new constructions; (i) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable; (ii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise;”
“The Housing for All (Urban) Mission or Pradhan Mantri Awas Yojana scheme: Housing for all mission are implemented through four verticals which are ‘In-situ’ Slum Redevelopment, Affordable Housing through credit linked subsidy, Affordable Housing in Partnership and Subsidy for beneficiary-led individual house construction.”
Recently, in an Advance Ruling (RAJ/AAR/2019-20/28) dated 18th December 2019 obtained by M/s S.R.S. Enterprises it was ruled by the advance ruling authority of Rajasthan that the exemption would also apply to sub-contractors.
Thus, exemption shall not be eligible in case the construction work is done as a whole including labour or if such construction involves multiple units (in case of Entry 11).
What becomes crucial here is to note that supplier should only and only provide pure labour services. Where supplier issues two separate bills i.e. one for supply of labour and one for supply of material but are co-terminus, then the same may be treated as composite supply and will shall not be eligible to claim the exemption benefit.
Summary: Rate of Tax (HSN Code – 9954)
|SERVICES||NOTIFICATION REFERENCE||RATE OF TAX|
|Services provided to Promoter developing RREP/REP (having less than 50% of the total carpet area as affordable apartment)||Notification No. 11/2017 Central Tax (Rate) dated 28th June 2017, as amended – Entry 3(va) and 3(xii)||18%|
|Services provided to Promoter developing RREP/REP (where carpet area of affordable apartment is not less than 50% of total carpet area)||Notification No. 11/2017 Central Tax (Rate) dated 28th June 2017, as amended – Entry 3(v)(da)||12%|
|Other construction services||Notification No. 11/2017 Central Tax (Rate) dated 28th June 2017, as amended – Entry 3(xii)||18%|
|Services provided by way of pure labour contracts of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a civil structure or any other original works pertaining to the beneficiary-led individual house construction or enhancement under the Housing for all (Urban) Mission or PMAY.
Services by way of pure labour contracts of construction, erection, commissioning, or installation of original works pertaining to a single residential unit otherwise that as a part of a residential complex.
|Notification No. 12/2017 dated 28th June 2017, as amended – Entry 10 and 11||Nil|