GST in Case of Work Contract Services

♦ What is Works Contract under GST ?

A contract of works, may relate to both immovable and immovable property.

E.g. if a contractor, takes a contract for the building work, it would be a works contract in relation to immovable property. Similarly, if a composite supply in relation to movable property such as fabrication/painting/annual maintenance contracts etc. is undertaken, the same would come in definition of a works contract.

Under GST laws,

the definition of “Works Contract” has been restricted to any work undertaken for an “Immovable Property” unlike the Service Tax and VAT provisions where works contracts for movable properties were also considered.

The Works Contracts has been defined in Section 2(119) of the CGST Act, 2017 as “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 definition of “Works Contract” it can be seen that the term works contract has been restricted to contract for building construction, fabrication etc of any immovable property only. Any such composite supply undertaken on goods say for example a Repairs or painting work done on any machinery will not fall within the definition of term works contract per se under GST. Such contracts would continue to remain composite supplies, but will not be treated as a Works Contract for the purposes of GST.

♦ Classification of Work Contract Under GST ?

As per Para 6 (a) of Schedule II to the CGST Act, 2017, works contracts as defined in section 2(119) of the CGST Act, 2017 shall be treated as a supply of services.

Thus, there is a clear-cut differentiation of a works contract as a supply of service under GST.

♦ Applicability of Composition scheme.

Composition scheme is not available to works contractors as it is treated as service as per Para 6 (a) of Schedule II to the CGST Act, 2017 under GST. Composition scheme is only available to suppliers of goods.

 This will be a big burden to the small contractors/sub-contractors who cannot opt for composition scheme. They will be forced to register as regular taxable person which substantially increasing their compliances and other cost.

♦ Place of Supply Provisions

The place of supply provisions under GST laws is very important as it decide which tax is to be levied. (CGST+SGST / IGST).

1) Works Contract under GST would necessarily involve immovable property.  In view of the same the place of supply would be governed by Section 12(3) of the IGST Act, 2017, where both the supplier and recipient are located in India.  The place of supply would be where the immovable property is located.

2) In case the immovable property is located outside India, and the supplier as well as recipient both are located in India, the place of supply would be the location of recipient as per proviso to Section 12(3) of the IGST Act, 2017.

3) As per Section 13(4) of the IGST Act, 2017, in cases where either the Supplier or the Recipient are located outside India, the place of supply shall be the place where the immovable property is located or intended to be located.

Analysis: –

1) If the location of work contractor and recipient of the work contract services is in two different state, the supply of services shall be treated as Inter State supply of services and IGST will be charged by provider of work contract service provider.

2) That there is no requirement for a Separate Registration in each state where a Works Contractor is working and he is permitted to make Inter State Supply from the principal state where he is located and registered under GST.

♦ Time of Supply Provisions for Work Contract services.

The time of supply fixes the point when the liability to charge GST arises. It also indicates when supply is deemed to have been established.

As per Section 13, Point of taxation is determined based on time of supply as stated below:

Time of supply will be earlier of the two mentioned below:

1. Date of Issue of Invoice (if Invoice issued within 30 days of supply of services) or Date of Provision of Service (if Invoice not issued within 30 days)

2. Date of Receipt of Payment (Date on which the payment is entered in the books or credit to the bank account whichever is earlier)

If Not then, Date of receipt of service in the books of account of the Recipient.

♦ Valuation 

Where,

• The total amount charged means sum of consideration charged for aforesaid service and amount charged for transfer of land or undivided share of land, as the case may be (total amount charged)
• and value of land/undivided share of land is 1/3rd of the total amount charged for such supply.

♦ Input Tax Credit for Works Contract

1) For Work Contract Service Provider

There is tremendous confusion regarding this provision in industry whether the work contract provider can avail credit of inputs and input services. They are mixing the provisions of blocked credit under section 17(5) with this provisions but one thing I have to clear blocked credit provisions is for Work contract service recipients and not for work contract service provider Composite supply of Works contract as defined in clause 119 of section 2 of CGST Act is liable for GST at prescribed rate with FULL Input Tax Credit (ITC) of Inputs And Input services. Service provider of Works Contract Service can avail credit on Input tax paid on Inputs and Input services.

2) For Service Receiver availing Works Contract Services

Section17(5)(c) of CGST Act states that Input tax credit shall not be available in 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

• In case where works contract is a sub-contractor, main contractor can claim the credit on tax paid on SUB CONTRACT i.e. input service for further supply of WCS
• In case of works contract of plant and machinery, service receiver can claim credit on tax on that works contract of plant and machinery.
• In other cases Input tax credit shall not be available for service receiver i.e. tax paid on works contract cannot be claimed by service receiver.