Taxation of works contract in erstwhile indirect taxes including VAT, CST and Service Tax involved complexities. Since both the element of service and transfer of property in goods is involved in a works contract transaction, there was always a dispute as to the ratio in which it has to be taxed under Service tax and various vat laws of different states. Composition schemes and other deductions were provided in different vat laws. Also abatement notifications and different methodologies of valuation were given in Service tax law. With the introduction of GST in India, the lawmakers have tried to resolve the issues and make law as simple as possible.
Whether all the issues in relation to works contract have been dealt with?
Let us now discuss the treatment of works contract, composite contracts and turnkey contracts as per the provisions of GST.
Meaning of Works Contract:
Section 2 Sub-section (119) of CGST Act defines work contract as:
Works contract means a contract, wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract and includes contract for building, construction, erection, installation, modification, repair, alteration or commissioning of any immovable property.
Ingredients of definition
1. It is a contract
2. Transfer of property in goods is involved therein even if the goods change their character in the execution of contract.
3. Includes contract for building, construction, erection, installation, modification, repair, alteration or commissioning
4. Of an immovable property (works contract in GST is only for the immovable property)
If all the above ingredients are involved in a contract, then the same is termed as works contract. However, the contracts, which are not for immovable property, provisions relating to ‘composite supply’ or ‘mixed supply’, will be applicable and taxed accordingly.
Definition of composite supply as per 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.
Illustration: Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply
Definition of Mixed Supply as per section 2(74) of the 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:
Illustration: A supply of package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be mixed supply if these items are supplied separately.
Tax treatment of Composite and Mixed supply is provided in Section 8 of the CGST Act 2017:
The tax liability on a composite or mixed supply shall be determined in the following manner, namely:–
- a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply;
- a mixed supply comprising of two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.
Supply
- Single supply
- Composite Supply
- Mixed Supply of Goods/services
Section 8(b)
- Immovable Other than immovable
- Property
Deemed Service Section 8(a) as per Schedule II
According to Clause 6(a) of Schedule II of the CGST Act:
The following composite supplies shall be treated as a supply of services, namely:
- works contract as defined in clause (119) of Section 2.
The confusion as regards the taxability of ‘works contract’ as services or as goods has been put to an end by the specific insertion in Schedule II. Therefore, works contract must be treated as a service for the purposes of taxability under GST. Accordingly, the provisions relating to supply of services like Time of supply, Place of supply and other provisions are to be applied. Also, the SAC code for the services of works contract has to be analysed for determination of rate of GST applicable on a contract.
There are some specific exemptions and reduction in GST rates for different types of works contract. Notification No. 12/2017 Central Tax (Rate) dated 28th June 2017 as amended from time to time provides for exemption from GST wrt following works contract services:
1. Composite supply of goods and services in which the value of supply of goods constitutes not more than 25 per cent. of the value of the said composite supply provided to the Central Government, State Government or Union territory or local authority or a Governmental authority or a Government Entity by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution.
2. 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 Pradhan Mantri Awas Yojana.
3. Services supplied by electricity distribution utilities by way of construction, erection, commissioning, or installation of infrastructure for extending electricity distribution network upto the tube well of the farmer or agriculturalist for agricultural use.
4. Services by way of pure labour contracts of construction, erection, commissioning, or installation of original works pertaining to a single residential unit otherwise than as a part of a residential complex.
Also, Notification No. 11/2017 Central Tax (Rate) dated 28th June 2017 as amended from time to time provides for different rates of GST on different types of works contract which are as follows:
1. In relation to construction of real estate projects, different rates are proscribed for RREP, REP and affordable housing projects, subject to fulfillment of conditions mentioned therein.
2. Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied to the Central Government, State Government, Union territory, a local authority, a Governmental Authority or a Government Entity by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of, –
(a) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);
(b) canal, dam or other irrigation works;
(c) pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal.
3. Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, other than that covered by items given in pt 1 above above] supplied by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,-
(a) a road, bridge, tunnel, or terminal for road transportation for use by general public;
(b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana;
(c) a civil structure or any other original works pertaining to the ln-situ redevelopment of existing slums using land as a resource, under the Housing for All (Urban) Mission/ Pradhan Mantri Awas Yojana (Urban)
(d) a civil structure or any other original works pertaining to the “Beneficiary led individual house construction / enhancement” under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana;
(da) a civil structure or any other original works pertaining to the “Economically Weaker Section (EWS) houses” constructed under the Affordable Housing in partnership by State or Union territory or local authority or urban development authority under the Housing for All (Urban) Mission/ Pradhan Mantri Awas Yojana (Urban)
(db) a civil structure or any other original works pertaining to the houses constructed or acquired under the Credit Linked Subsidy Scheme for Economically Weaker Section (EWS)/ Lower Income Group (LIG)/ Middle Income Group-1 (MlG-1)/ Middle Income Group-2 (MlG-2)‖ under the Housing for All (Urban)Mission/Pradhan Mantri Awas Yojana (Urban)
(e) a pollution control or effluent treatment plant, except located as a part of a factory; or
(f) a structure meant for funeral, burial or cremation of deceased
(g) a building owned by an entity registered under section 12AA of the Income Tax Act, 1961 (43 of 1961), which is used for carrying out the activities of providing, centralised cooking or distribution, for mid-day meals under the mid-day meal scheme sponsored by the Central Government, State Government, Union territory or local authorities.
4. Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, [other than that covered by items given in pt 1 above supplied by way of construction, erection, commissioning, or installation of original works pertaining to,-
(a) railways, [including]monorail and metro;
(b) a single residential unit otherwise than as a part of a residential complex;
(c) low-cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;
(d) low cost houses up to a carpet area of 60 square metres per house in a housing project approved by the competent authority under- (1) the ―Affordable Housing in Partnership‖ component of the Housing for All (Urban) Mission/Pradhan MantriAwasYojana; (2) any housing scheme of a State Government;
(da) low-cost houses up to a carpet area of 60 square metres per house in an affordable housing project which has been given infrastructure status vide notification of Government of India, in Ministry of Finance, Department of Economic Affairs vide F. No. 13/6/2009-INF, dated the 30th March, 2017;
(e) post-harvest storage infrastructure for agricultural produce including a cold storage for such purposes; or
(f) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages.
5. Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, other than that covered by items given in pt 1above, supplied by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of affordable residential apartments covered by sub- clause (a) of clause (xvi) of paragraph 4 below, in a project which commences on or after 1st April, 2019, or in an ongoing project in respect of which the promoter has not exercised option to pay central tax on construction of apartments at the rates as specified for item (ie) or (if), as the case may be, in the manner prescribed therein, (subject to fulfillment of conditions)
6. Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, other than that covered by items given in pt 1 aboveprovided to the Central Government, State Government, Union Territory, [a local authority, a Governmental Authority or a Government Entity by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of –
(a) a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;
(b) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or(iii) an art or cultural establishment; or
(c) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in paragraph 3 of the Schedule III of the Central Goods and Services Tax Act, 2017.
7. Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, involving predominantly earth work (that is, constituting more than 75per cent. of the value of the works contract) provided to the Central Government, State Government, Union territory, local authority, a Governmental Authority or a Government Entity.
8. Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017 and associated services, in respect of offshore works contract relating to oil and gas exploration and production (E&P) in the offshore area beyond 12 nautical miles from the nearest point of the appropriate base line.
9. Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017 provided by a sub-contractor to the main contractor providing services specified in item mentioned under pt 2 to 6 above to the Central Government, State Government, Union territory, a local authority, a Governmental Authority or a Government Entity.
10. Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017 provided by a sub-contractor to the main contractor providing services specified in item in point 7 above to the Central Government, State Government, Union territory, a local authority, a Governmental Authority or a Government Entity.
Different rates ranging from 5% to 12% has been prescribed for the above categories of works contract. However, for residual categories of works contract, the rate of GST is 18%.
Meaning of Turnkey Contracts
A term that is often used in the industry is ‘Turnkey contract’. What is a turnkey contract? How it is to be dealt with in GST?
Definition of Turnkey contract:
GST Act does not define the term as turnkey contract. As per general definition of the term, “A turnkey, a turnkey project, or a turnkey operation (also spelled turn-key) is a type of project that is constructed so that it can be sold to any buyer as a completed product.”
A turnkey project or contract as described by Duncan Wallace
“ a contract where the essential design emanates from, or is supplied by, the Contractor and not the owner, so that the legal responsibility for the design, suitability and performance of the work after completion will be made to rest … with the contractor …. ‘Turnkey’ is treated as merely signifying the design responsibility as the contractor’s.”
Turnkey refers to something that is ready for immediate use, generally used in the sale or supply of goods or services. The word is a reference to the fact that the customer, upon receiving the product, just needs to turn the ignition key to make it operational, or that the key just needs to be turned over to the customer. Turnkey is commonly used in the construction industry, for instance, in which it refers to bundling of materials and labour by the home-builder or general contractor to complete the home without owner involvement.
Where the turnkey contract is in relation to immovable property, it appears from the above stated provisions of GST that the same is in the nature of works contract. Therefore, the provisions of works contract should be applicable in the case of turnkey contracts. An interesting ruling has been given by Madhya Pradesh Authority of Advance ruling in the case of Vihaan Enterprise. The question raised was whether in the facts and circumstances of the case, value of all the goods supplied under the contract, independent of the works contract being executed in the works contract shall form part of the works contract?
Authority for Advance ruling held in the case:
Supply of goods under a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property are included in the value of contract for supply of service only where the transfer of property in goods (whether as goods or in some other form) is involved in the execution of the contract. Goods supplied under a turnkey contract, where there are multiple independent contracts, of which some are not in the nature of works contract, shall not be included in the value of contract merely on account of the fact that goods are being supplied under Turnkey Contract, part of which is in the nature of a works contract, unless such supply of all such goods is a part of and made in the execution of a works contract.
Therefore, from the above, it can be inferred that in case of a turnkey contract involving a works contract, it is not necessary that all the goods be transferred in pursuance of the works contract. The goods that are not transferred as the part of works contract are to be dealt with separately and as per the provisions of the GST Act.
Separate Contracts:
It is found that in some cases, the contractor enters into two different contracts with the contractee, one for the supply of materials and other for the provision of services. Now the questions arises – Whether the goods so supplied be treated as part of works contract and taxed accordingly or the contracts should be clubbed to make it a works contract?
To find out the answer, the definition of works contract may again be referred, which states that Works Contract means ‘a’contract. The definition talks of a single contract wherein transfer of property in goods is involved for specific activities in relation to an immovable property. Therefore, to constitute a works contract there should be a single contract and transfer of property in goods should be involved in the contract. Therefore, where there are more than one contracts for the supply of different goods and supply of services, it is interpreted that the contracts could not be merged to treat them as works contract.
Now, the question arises whether the different supplies under multiple contracts can be treated as composite supplies?
For the proper interpretation we may refer to the definition of Composite supply as per section 2(30) of 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.
Illustration: Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;
From the aforesaid definition it is clear that a supply constituting two or more supplies should be there for a supply to be treated as composite supply. In other words there should be a single supply constituting different supplies of goods and services therein.
Where there are multiple contracts between same persons for the same immovable property for the supply of goods and supply of services, based on the facts and circumstances of the case, it may so happen that the different supplies of goods and services may be treated as composite supplies, if it is established that the supplies are naturally bundled and supplied in conjunction with each other in the ordinary course of business. In that case as per section 8(a) of the CGST Act , the supply shall be treated as the supply of principal supply for all the goods and services so supplied and shall be taxed as work contract.
Alternatively, however in case of turnkey contracts involving works contract it may so happen that some supplies are not naturally bundled with the main supply but are being supplied by the same contractor for any reason then such supplies does not form part of the works contract and can be treated separately for taxation. In case of separate contracts of supply of goods and separate supply services, it does not partake the character of works contract and, may not be treated as composite supply under section 8(a) of the CGST Act 2017.
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