1. The standard rate of tax for composite supply of works contracts and also construction services is 9% CGST + 9% SGST and 18% IGST
2. As per the amendment the rate of tax is now reduced to 6% CGST + 6% SGST and 12% IGST in respect of services supplied to the Government, a local authority or a Governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of canal, dam or other irrigation works; pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal. Similar provision is also made in respect of contracts for a road, bridge, tunnel, or terminal for road transportation for use by general public.
4. In most such contracts the work is executed through sub contractors. Since sub contractor is giving service to the main contractor and not to the Government in my opinion services provided by sub contractor to main contractor will attract tax at the rate of 9% CGST + 9% SGST.
5. Under the circumstances it is likely that the input tax credit will be more than the output tax credits. Thus the main contractor will have accumulated credits because of inverted tax structure i.e. inward supplies are taxable at higher rate than outward supplies.
6. Question is whether refund can be claimed ?
As per the provisions of Sec 54 refund can be claimed only for two reasons
1. Zero rated supplies made without payment of tax.
2. Where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies.
The word input is defined to mean goods other than capital goods. The section is silent about input services. Sub contractors are service providers therefore in my opinion though tax rate of input services is higher than the tax rate of output supplies the main contractor will not be entitled to claim refunds but can carry it forward.
What is a remedy ?
A) Reduce the rate of tax for sub contractors : Under the earlier tax laws the exemption or reduced rate of tax applicable to main contractor was made applicable to the subcontracts also. If the Government makes similar provision in GST then the problem can be solved. The tax on inputs will be less than tax on outward supplies.
B) Amend sec 54 : The omission of word input services appears to be inadvertent mistake while drafting the GST Act. Goods and services are now at par. I do not find any reason for not including the words input services along with inputs. If the provision is suitably amended then main contractor will be able to claim refund of excess credit on account of higher rate on input services.
The amendment to sec. 54 is necessary not only for construction contracts but all service contracts where rate of tax on input services is higher than outward supplies. Another point is that in the definition clause the word used is outward supplies but sec 54 uses the word output supplies. For the purposes of uniformity instead of words “output supplies” used in sec 54 the words “outward supplies” may be replaced.
(Author can be reached at [email protected])