1. The works contract issue had been a never ending story right from the 46th amendment of Constitution of India in 1984 and it was settled only in 2002 by the Supreme Court in ACC Ltd case in 124 STC 59. But even after that celebrated decision, still thousands of works contract cases are pending in various High Courts.

In so far as Coimbatore and Tirupur are concerned, still the cases of dyeing contract in hosiery sector filed by Tirupur Dyers Association pending in Madras High Court. Now, it seems that the very same litigation has started again in GST regime also and it is not known whether the second innings will go for another 20 years in various courts.

2. The entire problem arises out of the hasty structurisation of the text of the provisions. It is a welcome step that a separate definition and charging section has been given for works contract, most popularly known as civil works contract as below:

2 (119) works contract mean a contract for building, construction, fabrication, completion erection, installation, repair, renovation, alteration or commissioning of any immovable property where in transfer of property in goods (whether as goods or in some other form is  involved in the execution or such contract “,

This may very well be classified as any works contract of any immovable property.

Now, the question is whether the works contracts relating to electrical installation, conversion of windows-doors out of  timber or other metals, painting, plumbering, laying of tiles etc will come under this works contract or not. These works contract do not comfortably fit into the following phrases of civil works contract.

Works contract for building or any immovable property in goods (whether as goods or in some other form) is  involved  in the execution of such contract ”.   

3. Now, the next issue is whether the above works contracts, normally entrusted to sub-contractors are liable to tax as civil works contract under Schedule II of GST at 18% or under composite supply as per Sec 2 (30) of CGST as given below :

Sec 2 (30) 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 in a principal supply;

Illustration :

“ Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance in a composite supply and supply of goods is a principal supply.”

4. For example, granites and paints are liable to tax at 28%. If the works contractors themselves do the laying of granites and painting works, the rate of tax will be 18% and if the same is entrusted to any sub– contractors, then it will come under Sec 2 (30) i.e composite supply and liable to tax at 28%. Unless clear cut clarifications are issued for such works contract, lot of litigations will likely to arise in future.

5. Similarly, as stated above, dyeing contract on yarn and fabrics is also a problematic area. If the total amount received towards dyeing contract for example is Rs.100, the value of supply of dyes and chemicals will be about Rs.60 and the supply of services is Rs.40. Thus, it is being a material intensive job work and not labour intensive it cannot be classified as normal job work defined under Sec 2 (68) of CGST Act as below :

Sec 2 (68) job works: means any treatment or process undertaken by a person on goods belongings to another registered person and the expression “job works” shall be construed accordingly.

Then it has to be assessed at 18% as composite supply under Sec 2 (30) of CGST only.

6. While things are being so, GST council has given reduced rate of tax at 5% for the following items on 5.8.2017 as below:

Job work services in respect of textiles and textile products (including MMF yarn, garments, made ups etc falling in chapters 50 to 63).”

7. To put the controversial issues in nutshell, the dyeing contract, sizing contract, bleaching contract in hosiery and woven textile sector fall under composite supply, rather than under job work. The Department should awake from the traditional slumber atleast now and make clarification and they should refrain from making revision of assessment after six years. In a paradoxical context, washing, cleaning and dyeing services are liable to tax at 18% under SAC code 9997 in classification of Services also to be noted in this contextual juncture.

8. The  Department should come out with a clear cut clarifications at an earliest time, (as there is no sign of constituting of Advance Ruling Authority),  regarding the rate of tax for dyeing, bleaching, sizing works contract (i.e with material + labour) as the entire Tirupur textile industry at present collect only 5%. Similarly, for all works contracts like laying of tiles, electrical and fixing of windows-doors, painting contract etc, the department should clarify whether to levy tax under composite supply under Sec 8 or under Sec 7 (i) (d) of CGST Act. Most of the works contractors still adopt the old procedure adopted under VAT regime, collecting tax for materials and collecting tax for services and thereby ignoring the very basic concept of composite supply.

9. It is high time for Department Heads under CGST and SGST to guide the asseesees in the beginning stage itself, as their responsibility is more on guidance rather than mercilessly levying and collecting arbitrary taxes. There is no justification for delaying the constitution of Advance Ruling Authority and it is against principles of natural justice. Already the Government committed blunder by introducing the GST even without uploading the basic and important templates and icons in the common portal. The tracks of the tax line should have been tested by trial run well in advance with all the templates of the Act and only after that Government should have allowed the GST train to run. But that was not done.

10. Anyway, gone is gone. Now, at least the Babus of Central and State Government should meet the trade and industry, give clarification and make facilitation over E-mail etc, to get the correct rate of tax for each and every commodity/services and specifically for movable and immovable works contract. The Finance Minister should evince more interest in removal of difficulties encountered by dealers rather than announcing buoyancy in tax collections during his press meet.

Article by: K. Palaniswamy, Deputy Commissioner (Commercial Taxes) Retd,Coimbatore.

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2 responses to “Job Work And Composite Supply Under GST”

  1. kirti patel says:

    [1] what will be the code for Rental of Generator [DGSet],
    [2] code for providing first filling of diesel when Install a new Generator[DGSet] which supplied to party on permanent basis.
    [3] What will be code for Erection of DGSet with Installation work

  2. Velumani says:

    Sir, you article is super

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