CA Ankita Garg
Works contract is a mixture of goods and services but it is neither a composite supply nor a mixed supply as it has been defined as per Sec. 2(119) of CGST Act. As per the said section “ 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. Thus even when there is a transfer of property in goods during execution of any works contract , such supply will be included in Works Contract only. For example ,construction of a new building, installation and commissioning of Cooling Towers, etc.
Further, GST Schedule II (entry 5(b)) clearly states that the following activity shall be treated as supply of service:-
“Construction of a complex, building, civil structure or a part thereof , including a complex or building intended for sale to a buyer, wholly or partly , except where the entire consideration has been received after issuance of completion certificate, where required , by the competent authority or after its after occupation, whichever is earlier.” Thus GST with its “One Nation One Tax” has removed the confusion regarding the tax treatment. Further there is one more clause in Schedule II ( Entry 6(a)) which states that the following composite supplies shall be treated as a supply of services namely:-
“ Works contract under S. 2(119)”
This means works contract will be treated as service and tax would be charged accordingly (not as goods or part goods/part services) which was done in the current regime. Consequently GST rates, time of supply rules, place of supply rules, valuation rules as are applicable on services will apply to works contracts. While deciding whether a supply is intra-state or inter-state, the place of supply of service shall be applicable to the Works contract.
Currently, supply of goods is taxable in the form of VAT and Service tax is applicable on the service component. Under the current regime, different states have different schemes for VAT. There are different composition schemes with different VAT rates. Service tax too is complex with 60% abatement on new works and 30% abatement on repair contracts. GST will solve such with a much simpler straightforward calculation.
Now, let us understand the different provisions applicable to a Works Contract Service Provider in the GST scenario:-
1. Registration:- Section 22 says that every supplier shall be liable to be registered under GST Act in the State or Union territory, other than special Category states, from where he makes a taxable supply of Goods or Services or Both, if his aggregate turnover in a Financial Year exceeds Twenty Lakh rupees. Provided that where such person makes taxable supplies of goods or services or both from any of the special category states , he shall be liable to be registered if his aggregate turnover in a financial year exceeds ten lakh rupees.
Explanation:- The expression “ Special Category States” shall mean the states as specified in sub-clause (g) of clause (4) of Article 279A of the Constitution.
Construction sector over the years has got used to payment of taxes under simplified composition schemes on the total project value without any Input Tax Credit. Due to unorganized nature of this sector, there shall always be a class of contractors who may not be able to maintain records as per the prescribed norms. However under GST Regime there is no such scheme of taxation. Section 10(2)(a) of CGST Act further states that a person supplying services other than Restaurant services is not eligible to opt for composition scheme.
Hence, a Works contract Service provider whose turnover exceeds Twenty lakh rupees or Twenty lakh rupees in case of specified states is required to get himself registered as a normal supplier( not eligible for composition). This will be a big blow to the small sub-contractors who cannot opt for composition scheme. They will be forced to register for normal taxation scheme increasing their compliances and costs.
Now the question arises in which state the Works Contract service provider has to take registration?
Let us understand this by way of an example, ABC Ltd. is engaged in construction of Residential Buildings in Delhi, Mumbai, Hyderabad and Punjab.
In this case, the Company should obtain registration in all the states where it has a Project office.
2. Levy and collection
There shall be levied a tax called the CGST / SGST or IGST on all intra-state or inter-state supplies of goods or services or both . Hence, GST will be levied based on the place of supply on the rates of services.
3. Time of supply
Time of supply means the point in time when goods/services are deemed to be supplied/ rendered. It enables us to determine the rate of tax, value, and due dates for payment of taxes. The liability to pay CGST / SGST will arise at the time of supply as determined for goods and services.
Time of Supply shall be as under for the purpose of determining a regular works contract under GST:
Section 12(2) says that the time of supply of services shall be the earliest of the following dates, namely:—
(a) the date of issue of invoice by the supplier, if the invoice is issued within the period prescribed under sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier; or
(b) the date of provision of service, if the invoice is not issued within the period prescribed under sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier; or
(c) the date on which the recipient shows the receipt of services in his books of account, in a case where the provisions of clause (a) or clause (b) do not apply.
If the supplier receives an amount up to One Thousand Rupees in excess of the invoice amount, the time of supply for the extra amount shall be the date of issue of invoice (at the option of the supplier).
(a) Date of invoice 25th May 2018
(b) Date of receipt of payment 12th July 2018
(c) Date when supplier recorded receipt in books 12th July 2018
Time of supply will be 25th May 2018
Time of Supply in case of continuous service
Time of supply in this case will be
1. Where the due date of payment is ascertainable from the contract, the date on which the payment is liable to be made by the recipient of service, whether or not any invoice is issued or any payment has been received by the supplier of service
2. Where the due date of payment is not ascertainable from the contract, each such time when the supplier of service receives the payment, or issues an invoice, whichever is earlier
3. Where payment is linked to the completion of an event, the time of completion of that event
Time of supply under Reverse charge
Reverse charge means the liability to pay tax is on the recipient of goods/services instead of the supplier. In case of reverse charge, time of supply shall be earliest of the following dates-
The date of payment
The date immediately after SIXTY (60) days from the date of issue of invoice by the supplier
Example for reverse charge:
1. Date of payment 15th July 2018
2. Date of invoice 1st July 2018
3. Date of entry in books of receiver 18th July 2018
Time of supply of service 15th July 2018
If it is not possible to determine the time of supply under (a) or (b) , the time of supply shall be the date of entry in the books of account of the receiver of service.
For clause (a)- the date of payment shall be earlier of-
1. The date on which the recipient entered the payment in his books
2. The date on which the payment is debited from his bank account
4. Place of Supply:
Place of supply in case of WCT shall be governed by place of supply of service rules which are as follows:-
Location of the immovable property is used to determine the taxability of a transaction involving supply of service. i.e.in case , in case, the immovable property is situated in the same state as that of the place of registration , CGST and SGST shall be levied and in case, the immovable property is situated outside the state in which the registration is obtained , IGST will be levied.
5. Input Tax Credit
Section 17 (5)( c) : Input Tax Credit shall not be available in respect of the following, namely:
“ 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” The restriction does not apply to plant and machinery and also in case the input services are further used for supply of Works Contract service under GST( Contractor can avail the ITC in respect of services availed from the sub-contractor).
No abatement has been prescribed for works contract service under GST so far as was there in the earlier regimes ( Pre- GST).
The article has been written by CA. Ankita Garg who can be reached at email@example.com
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