Overview of GST on Government works contract

Government allocates every year a major portion in its budget towards development of Roadways and other Infrastructure projects. Construction of Roads, bridges, dams, are the main constituents in Infrastructure development. As infrastructure is highly responsible for propelling growth of other sectors and India’s overall development, Government of India is giving huge impetus for development of Infrastructure and construction services especially roads.

Under GST Laws, Construction of Roads, bridges, dams, canals etc fall under the definition of Works contract.

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.” 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 demarcation of a works contract as a supply of service under GST.

Taxability of Roads and Other Government works contract:

As per Notification 20/2017, GST on construction of Roads, Canals, bridges and other government works contract comes under the slab rate of 12% 

Input Tax credit:

In execution of Government works, the Works contractor uses certain inputs like cement, steel, Concrete etc., and may even sub contract some part of work to other contractors. He is thus eligible to claim GST input on goods/services which are used for the purposes of his business.

But a registered person will be entitled to claim input tax credit only upon fulfillment of the following conditions {Section 16(2) of CGST Act}:

• He is in possession of tax invoice/ debit note issued by a registered supplier or any other tax paying documents
• He has received the goods and /or services or both. In case of supply of goods in lots/ instalments, the credit would be available in full on the receipt of the last lot/ installment.
• The tax charged on such supply is paid to the Government by the supplier (by way of cash or by utilizing input tax credit)
• He has furnished a valid return.
• He paid the Invoice amount to the supplier within 180 days from the date of issue.

As per Section 16(4) of CGST Act, the time limit to claim input tax credit is earliest of following two events:

• Due Date of filing of the return for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains
• Furnishing of the annual return

Place of Supply for Services:

 Execution of Government works are typically site based services. As per section 12 of IGST act,2017 Place of supply for carrying out construction of immovable property is Location at which the immovable property is located (or intended to be located). Eg: M/s ABC ltd registered in Karnataka was awarded works contract by Amaravati Development corporation (Andhra Pradesh) for construction of Road situated in Amravati. The Place of supply of services is Amaravati (Andhra Pradesh) and ABC ltd need to get GST registration in Andhra Pradesh.

Time of Supply for Services: 

It is important to determine the time of supply to ascertain the point in time where the liability to pay GST arises. Construction contracts have a long gestation period, and as a result, construction of roads, bridges and canals may be regarded as continuous supply of service. As per 2(33) of CGST Act 2017 “Continuous supply of service” means a supply of service which is provided or agreed to be provided continuously or on recurring basis under a contract for a period exceeding Three months with periodic payment obligations and includes supply of such services as the government may subject to such conditions as it may by notification specify.” The Issue of Invoice for such continuous supply of service needs to be done as per the provisions of section 31(5) of the CGST Act,2017.

As per section 31(5) of CGST Act in case of continuous supply of service:-

• Where the due date of payment is ascertainable or predetermined from the “Contract” then the invoice shall be issued on or before the due date of payment.
• Where the due date of payment is not ascertainable or not predetermined from the contract then the invoice shall be issued before or at the time when the supplier of service receives payment.
• Where the payment is linked to the “Completion of an event” the invoice shall be issued on or before the date of completion of that event.

Taxability of Advance Receipts/Mobilization Advance:

GST is required to be paid in respect of advances received for supply of services. Once Government awards work, depending upon the terms of contract, mobilization advance is released. Details of Advance received and their adjustment thereof are shown in GSTR 1.

TDS Mechanism under GST:

GST TDS provisions (Sec 51 of CGST Act) put into action w.e.f. 01-10-2018 by Notification 50/2018 dated 13/09/2018.

Following persons shall be liable to deduct TDS @ 2% (1% CGST and 1% SGST or 2% for IGST) :

• A department or establishment of the Central Government or State Government
• Local Authority
• Governmental Agencies
• an authority or a board or any other body, – (i) set up by an Act of Parliament or a State Legislature; or (ii) established by any Government, with fifty-one per cent. or more participation by way of equity or control, to carry out any function
• Society established by the Central Government or the State Government or a Local Authority under the Societies Registration Act, 1860 (21 of 1860);
• Public sector undertakings.

The contractor will receive payments net of TDS. TDS deducted will be deposited by concerned government department by filing form GSTR7. Once TDS is deposited, it will be reflected in Contractors GST portal. Contractor thus needs to do periodic reconciliation of TDS deducted and TDS received in GST portal.

Conclusion:

As a developing country on the precipice of growth, the road sector and government works contract has assumed a lot of significance for India. The implementation of Goods and Services Tax (GST) is, without a doubt, the single biggest reform in indirect taxes in India. GST has revolutionized various aspects of business and every industry has experienced certain issues arising out of GST implementation. The decrease in rate from 18% to 12% for Government works contract is clearly a positive step. The concept is still evolving and we hope GST will achieve its goal of One nation, One tax.