Works Contract Services under GST- A Compendium regarding Development/Changes in the law

Works contract have always been a matter of mystery and doubts, however in current GST scenario many things are sorted out unlike erstwhile VAT and Service Tax laws. In this article we have tried to compile and discuss all the relevant sections, rules and notifications in lieu of Works Contract Services.

At the Outset definition of Works Contract as per Goods and Service Tax Act, 2017 is must to be discussed:

Section 2 (119) of the CGST Act, 2017:  “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 the above definition under GST law this has been made very clear that `works contract` shall be applied only on the 14 types of contracts related to Immovable Property. Any other contracts like say fabrication of Iron steel goods or like fabrication, repair work done in automobile workshop shall not be considered under Works Contract instead that shall be considered as Composite Supply as defined u/s 2(30) of CGST Act,2017.

Immovable Property

Word Immovable Property has not been defined under GST Act, hence the interpretation and definition of the same has to be taken from General Clauses Act 1897, wherein as per Section 3 (26) “immovable property shall include land, benefits to arise out of land and things attached to the earth, or permanently fastened to anything attached to the earth

Works Contract – Supply of Goods or Supply of Services?

Although the question has been discussed in length in the judgment of Hon`ble Supreme Court in the case of State of Madras v. Gannon Dunkerley & Co (Madras) Ltd. [1959 SCR 379], wherein it was held that in a building contract which is entire and indivisible, there is no sale of goods involved in it.

Furthermore, in the Para No.6 of Schedule-II of CGST Act, it has been clearly mentioned that ”works contract” shall be considered as Composite supply of services. Accordingly, under GST Works Contract shall be categorised as Supply of Services.

GST Rates in Works Contract:

The master notification for the GST Rates is 11/2017 (CTR) dated 28.06.2017 which had described GST rates on various types of works contract, depending on type of the works contract and depending on the service receiver and service provider. Under the heading Construction Services at Serial No.3 of the notification, initially three types of construction activities were introduced through clause (i) to (iii).

There have been various amendments regarding change in GST Rates in the said notification till date and many types of works contract activities were added through following notifications: –

√ 20/2017 (CTR) dated 22.08.2017

√ 24/2017 (CTR) dated 21.09.2017

√ 31/2017 (CTR) dated 13.10.2017

√ 46/2017 (CTR) dated 14.11.2017

√ 01/2018 (CTR) dated 25.01.2018

√ 17/2018 (CTR) dated 27.07.2018

√ 30/2018 (CTR) dated 31.12.2018

√ 03/2019 (CTR) dated 29.03.2019

Broad understanding and category of GST Rates under Works Contract in notification 11/2017 (as amended)

• Works Contract Services provided to Government Departments

Clauses (iii) and (vi) and (vii) at Serial No.3 of the notification states about works contract services provided to 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.

Clause (iii) covers the works contracts for construction of: –

• Historical monuments
• canal, dam or other irrigation works;
• pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal

√ GST Rate is 12% in this case

Clause (vi) covers the works contracts for construction of: –

• A civil structure or any other original works used other than for commerce, industry, business or profession
• A structure for use as educational, clinical or art or cultural establishment
• A residential complex meant for self-use or use of employees specified in paragraph 3 of the Schedule III of CGST Act,2017.

√ GST Rate is 12% in this case

Clause (vii) covers the works contracts wherein more than 75% value of total contract is related to Earthwork. Here earthwork is not defined in GST Act, however in common parlance it would be understood as clearing of earth, excavation, laying of earth, which is basically done for preparation of land for certain other purpose or further work to be executed on that land.

• GST Rate is 5% in this case

• Works Contract Services by Sub-Contractor

Clause (ix) covers the works contract services provided by a sub-contractor to the main contractor providing services specified in clause (iii) and (vi) to the Central Government, State Government, Union territory, a local authority, a Governmental Authority or a Government Entity.

√ GST Rate is 12% in this case

Clause (x) covers the works contract services provided by a sub-contractor to the main contractor providing services specified in clause (vii) Central Government, State Government, Union territory, a local authority, a Governmental Authority or a Government Entity.

√ GST Rate is 5% in this case

Here in this case the words to be marked are ”by a sub-contractor to the main contractor”, hence in our opinion, if a sub-contractor further sub-lets a small part of work to another contractor then that transaction shall be taxable @ 18% under clause xii of notification.

• Works Contract Services relating to particular type of work

Clauses (iv) and (v) at Serial No.3 of the notification states about works contract services related to particular type of work keeping aside the fact who is the awarder of contract.

Clause (iv) covers the works contracts related to construction of: –

• Road, bridge, tunnel or terminal for road transportation for use by general public
• a pollution control or effluent treatment plant, except located as a part of a factory;
• structure meant for funeral, burial or cremation of deceased.
• Building owned by an entity registered under section 12AA of IT Act, used for carrying out the activities of providing, centralized 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.

√ GST Rate is 12% in this case

Other than above there are various constructions under various schemes that are laid:   

A civil structure or any other original works pertaining to a scheme under:

• Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana;
• Housing for All (Urban) Mission/ Pradhan Mantri Awas Yojana (Urban) pertaining to lnsitu redevelopment of existing slums using land as a resource;
• Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana pertaining to “Beneficiary led individual house construction / enhancement”;
• Housing for All (Urban) Mission/ Pradhan Mantri Awas Yojana (Urban) pertaining to “Economically Weaker Section (EWS) houses” constructed under the Affordable Housing in partnership by State or UT or local authority or UDA;
• Housing for All (Urban) Mission/ Pradhan Mantri Awas Yojana (Urban) pertaining to 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)”;

√ GST Rate is 12% in this case

Clause (v) covers the works contracts pertaining to: –

• Railways, including monorail and metro
• a single residential unit otherwise than as a part of a residential complex;
• construction of low-cost houses upto 60 square meters per house approved by different authorities as prescribed
• Storage Infrastructure for post-harvest storages, cold storage
• mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages.

√ GST Rate is 12% in this case

• Works Contract Services pertaining in respect of offshore works

Clause (viii) covers the works contracts pertaining 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.

√ GST Rate is 12% in this case

• Works Contract Services other than all above

Clause (xii) covers the all other works contracts that are not covered or mentioned above. In general, all the contracts between private parties like construction of buildings, warehouses etc, shall covered under this entry.

√ GST Rate is 18% in this case

• Works Contract services as mentioned in Entry No. 38 (Exception)

Service by way of construction or engineering or installation or other technical services, provided in relation of setting up of following, –

a) Bio-gas plant

b) Solar power based devices

c) Solar power generating system

d) Wind mills, Wind Operated Electricity Generator (WOEG)

e) Waste to energy plants / devices

f) Ocean waves/tidal waves energy devices/plants

This entry shall be read in conjunction with serial number 234 of Schedule I of the notification No.1/2017-Central Tax (Rate),

√ GST Rate is mentioned as 18% in this entry

However, at Entry No.234 of Schedule-I of notification 1/2017, all the above items, if sold separately are taxable @ 5%. Hence an explanation has been given at entry no. 234, which says that if the goods specified in this entry are supplied, by a supplier, along with supplies of other goods and services, one of which being a taxable service specified in the entry at S. No. 38 as stated above, value of supply of goods for the purposes of this entry shall be deemed as 70% of the gross consideration charged for all such supplies, and the remaining 30% of the gross consideration charged shall be deemed as value of the said taxable service.

Input Tax Credit

Section 17 (5) (c) of CGST Act,2017 read with its explanation is the relevant section regarding ITC of Works contract services, which restricts the service recipient to claim ITC of works contract services.

Section 17 (5) (c) read as under:-

(c) 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;

Explanation––For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property.

So accordingly: –

√ ITC related to works contract services cannot be claimed by service recipient.

But:

√ If works contract services are related to plant and machinery, ITC can be claimed

√ If works contract services are received by recipient for further supply of services, ITC can be claimed

√ If expenses of works contract services are not capitalised and instead debited to Profit & Loss account, ITC can be claimed

Explanation––For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes—

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises

Case Study-1

• ABC Limited awarded a contract for complete construction of its showroom to XYZ Limited, that includes civil structure, interior decoration, electrical fittings etc. Value of the work was calculated at Rs.10 Crores.
• In this case XYZ limited will charge 18% GST on Rs. 10 crores to ABC Limited and ABC Limited will not be eligible to claim ITC

Case Study -2

• In the above case XYZ limited who is a contractor, sub-let the work of electrical fittings valuing Rs.2 crores to PQR Limited.
• In this case PQR Limited will charge 18% GST on Rs.2 crores to XYZ Limited and XYX Limited will be eligible to claim ITC.

Case Study -3

• ABC limited awards a contract of renovation of its showroom, to XYZ Limited valuing Rs. 50 Lacs.
• In this case XYZ Limited will charge 18% GST on Rs.50 Lacs to ABC Limited and if ABC books the expenses in Profit & Loss account, ITC can be claimed. However, if this amount is capitalised by ABC then ITC cannot be claimed.

Case Study -4

• ABC limited have bought new machineries in its factories, and a strong foundation is needed so that to install the machineries firmly. Work of foundation is awarded to XYZ Limited for Rs 10 Lacs.
• In this case XYZ Limited will charge 18% GST on Rs.10 Lacs to ABC Limited and ABC shall be eligible to claim ITC particularly in lieu of the foundation, because foundation is included in the definition of plant and machinery.

Case Study -5

• A company took a land on lease for development of resort for 30 years from a Government entity. The completion of project took 2 years, hence the lease premium and lease rent paid during the pre-operative period i.e. 2 years was capitalised by the company. Whether the GST paid on lease rent shall ab admissible ITC or not ?
• Here reference is taken from the judgement of GGL Hotel and Resort Company Ltd. [2019] 105 taxmann.com 248 (GST AAAR West Bengal), wherein the appellate authority has observed in para no.14 of the order that lease rent paid during pre-operative period has direct nexus with the construction of the resort, hence the ITC on such lease rent is inadmissible.

Case Study -6

• A company got certain repairing jobs of various nature such as:
  • Building Repairing Works
  • Electric Installation repairing work
  • Sanitary fitting repairing works
  • Furniture & Fixtures repairing work

• Here, in our opinion basic rule/test that should be applied is: –

√ If the expenses are capitalised to immovable property: ITC shall NOT be allowed to the extent of capitalisation

√ If repairing is related to movable properties: ITC shall be allowed

Here reference is taken from Advance Ruling of Rambagh palace Hotels Pvt. Ltd. (GST AAR Rajasthan) Advance Ruling No. RAJ/AAR/2019-20/05 dated 30/04/2019

Case Study -7

• A company is involved in construction of large shopping malls for the purpose of letting out its property. The company is also paying GST on its rent income. Company has accumulated amount of ITC in respect of purchases of inputs in the form of goods and services.
• Hon`ble Orrisa High Court in the judgment of Safari Retreats Private Limited Vs Chief Commissioner of Central Goods & Service tax (Orissa High Court) (W.P. (C) No. 20463 of 2018) has held that if the assessee is required to pay GST on the rental income arising out of the investment on which he has paid GST, it is required to have the input credit on the GST

Place of Supply

Place of Supply in the case of works contract shall be governed by Section 2(86) of CGST Act, read with Section 12(3)(a) of IGST Act. Herein location of the immovable property shall be important to determine the place of supply.

• If recipient of service or supplier of services are located in India, place of Supply shall be the location at which the immovable property is located or intended to be located. (Section 12(3)(a) of IGST Act)
• If location of immovable property is outside India, place of supply shall be the location of the recipient. (Provision to Section 12(3) of IGST Act)
• If either recipient of service or supplier of services is located outside India, place of supply shall be the location at which immovable property is situated (Section 13(4) of IGST Act).

Examples:

ABC, Jaipur awards XYZ, Jaipur a contract for construction of warehouse at Jaipur, place of supply shall be Jaipur. CGST & SGST shall be charged by XYZ, Jaipur (Section 12(3)(a) of IGST Act)

ABC, Jaipur awards XYZ, Delhi a contract for construction of warehouse at Jaipur, place of supply shall be Jaipur. IGST shall be charged by XYZ, Delhi (Section 12(3)(a) of IGST Act)

ABC, Jaipur awards XYZ, Jaipur a contract for construction of warehouse at Delhi, place of supply shall be Delhi. IGST shall be charged by XYZ, Jaipur (Section 12(3)(a) of IGST Act)

ABC, Jaipur awards XYZ, Delhi a contract for construction of warehouse at Dubai, place of supply shall be Jaipur. IGST shall be charged by XYZ, Delhi (Provision to Section 12(3) of IGST Act)

ABC, Jaipur awards XYZ, Dubai a contract for construction of warehouse at Jaipur, place of supply shall be Jaipur. IGST shall be charged by XYZ, Delhi (Section 13(4) of IGST Act)

PHED, Jaipur awards XYZ, Jaipur a contract for installation of water pipeline of 100 KMs which run from Neemrana (Rajasthan) to Gurgaon (Haryana), wherein 60Kms is in Rajasthan and balance 40Kms is in Gurgaon. Hence accordingly, services shall be deemed to be supplied in 60:40 ratio in Rajasthan and Haryana  (Rule 4 of IGST Rules)

Time of Supply

Time of Supply in the case of services is determined as per Section 13 of CGST Act read with Section 31 of CGST Act.

As per Section 13 (2), Time of Supply of service shall be determined as earliest of the following: –

a)  the date of issue of invoice by the supplier, if the invoice is issued within the period prescribed under section 31or 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 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:

For the sake of example following tables are prepared:

Case: When Invoice is issued by the supplier, within 30 days from date of supply of service: –

Date of event	Particulars	Whether Time of Supply applied?
14/04/2020	Contract awarded of Rs. 10 lacs	NA
15/04/2020	Advance Received of Rs 1 Lac	Yes, Value shall be Rs 1 Lac
30/04/2020	Advance Received of Rs 1 Lac	Yes, Value shall be Rs 1 Lac
31/05/2020	Advance Received of Rs 3 Lac	Yes, Value shall be Rs 3 Lacs
15/06/2020	Work execution completed
20/06/2020	Final Invoice issued by supplier	Yes, Value shall be balance Rs 5 Lac
30/06/2020	Balance Payment Received	NA
30/09/2020	Final Payment Received	NA

Case: When Invoice is NOT issued by the supplier, within 30 days from date of supply of service: –

Date of event	Particulars	Whether Time of Supply applied?
14/04/2020	Contract awarded of Rs. 10 lacs	NA
15/04/2020	Advance Received of Rs 1 Lac	Yes, Value shall be Rs 1 Lac
30/04/2020	Advance Received of Rs 1 Lac	Yes, Value shall be Rs 1 Lac
31/05/2020	Advance Received of Rs 3 Lac	Yes, Value shall be Rs 3 Lacs
15/06/2020	Work execution completed	Yes, Value shall be balance Rs 5 Lacs (because invoice not issued within 30 days)

Furthermore, in case of Works contract services there are contracts wherein period of contract extends to more than 3 months, which is defined as “continuous supply of services“ under Section 2(33) of CGST Act and accordingly Section 31(5) of CGST Act has to be applied for the time to issue tax invoice: –

a) where the due date of payment is ascertainable from the contract, the invoice shall be issued on or before the due date of payment;

b) where the due date of payment is not ascertainable from the contract, the invoice shall be issued before or at the time when the supplier of service receives the payment;

c) 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.

Records to be maintained by a Supplier of Works Contract services

Rule 56 (14) of CGST Rules, prescribes the records and accounts to be maintained:

(14) Every registered person executing works contract shall keep separate accounts for works contract showing –

a) the names and addresses of the persons on whose behalf the works contract is executed;

b) description, value and quantity (wherever applicable) of goods or services:

a. received for the execution of works contract;

b. utilized in the execution of works contract;

c) the details of payment received in respect of each works contract; and

d) the names and addresses of suppliers from whom he received goods or services.

E-way Bill

In the case of works contract, generally whenever material is procured, it is directly delivered at work site by the seller and accordingly E-way bill is generated by that seller under Bill To- Ship To model. Hence, in such cases there is no requirement of generation of E-way bill by the contractor.

Furthermore, there may be cases wherein the goods are procured by the contractor and stored in its godown at principal address or may be goods are stored at a store nearest to the work site.

In both the cases, whenever material is dispatched from the store/godown to the work site, it can be moved through a Delivery Challan as prescribed in Rule 55 of CGST Rules and alongwith it, E-way bill shall be issued with the details as mentioned in the delivery challan.

Further, when the invoice related to Works Contract services are issued, there is no requirement to generate E-way Bill.

TDS (Tax Deducted at Source) (Section-51 & Rule 66)

Section 51 of CGST Act, states that if any supply (in this case supply of works contract services) is made under a contract and value of that supply exceeds Rs.2.50 lacs, then TDS @ 2% shall be deducted by the awarder while making payments to the contractors.

This provision is applicable on the contracts awarded by:

a) Central Government or State Government departments

b) Local Authority

c) Government agencies

d) Or any other persons as may be notified by the Government

The said TDS can be claimed through GST Portal and after being claimed the amount is reflected in the cash ledger of respective heads.

Refunds (Section 54 and Rule 89)

In case of contractors, broadly the GST rates on outward supplies are 12% or 18%, whereas GST Rates on inputs and input services varies from 12% to 28%, this results in accumulation of Input Tax Credits. Also, in the course of work execution contractors receives Input Services from their sub-contractors, wherein input tax credit is claimed by contractor on such invoices. Contractor claims total input tax credits on inputs and input services.

Although Section 54(3) states about claim of refunds in the case of accumulated input tax credit, however there is a restriction of refund only related to ITC of Inputs and not for Input Services. Therefore, in my opinion and practically, refund of accumulated ITC may not be claimed by contractors, where contractors are claiming ITC related to input services.    

Apart from it in case of contractors dealing in Government awarded contracts TDS @ 2% is deducted, which may get accumulated in the cash ledger, if not used against the liabilities, can be claimed for refund. (Section 49 (6) r/w Provision to Section 54(1))

Valuation (Section-15 r/w chapter-VI of CGST Rules)

There is no specific section or rules drafted for the valuation of works contract supplies, however section 15 shall apply for the purpose of valuation.

> In the case of works contract if transfer of property in land or undivided share of land is included then:

Value of supply of service and goods portion in such supply =

Total amount charged for such supply (-) Value of share of land or undivided share of land

Here total amount means sum total of consideration charged for the aforesaid service and amount charged for transfer of land or undivided share of land, as the case may be. (Value of land shall deem to be 33% of total value of supply) (Note-2 of Notification 11/2017)

> In case of works contract if transfer of property in land or undivided share of land is NOT included then the transaction value shall be the value of supply.

Further, for the purpose of valuation following shall be included in the value of taxable supply:

1. Any taxes, fees or charged levied under any other law apart from GST

2. Expenses incurred by the buyer on behalf of the supplier

3. Interest, late-fees or penalty

4. Any direct subsidies or subsidies provided by the government

5. Any other incidental expenses such as commission or packaging and handling costs incurred by the supplier.

Example

ABC enters into a contract with XYZ of Rs 50 Crores (plus GST) for construction of a warehouse on turnkey basis i.e. including all the procurements and erection. However, XYZ states that Cement and Steel shall be provided by XYZ, which apporxly values of Rs 15 Crores. In this case although the ABC shall be billing for Rs 35 Crores, but the taxable value for GST shall be Rs. 50 Crores and accordingly GST has to be charges at value of Rs 50 Crores. (Section 15(2)(b)).

Disclaimer: The entire above stated article is squarely based on our opinion, derived from the interpretation of the respective sections, rules and circulars as amended and other notifications. The observations are the personal view and the authors do not take responsibility of the same and this cannot be quoted before any authority