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What is works contract?
In simple words works contract is a contract of service which may also involve supply of goods in execution of the contract. With a service part of contract being basis, works contract is basically a composite supply of both services & goods.
The term 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.”
From the above definition it can be understood that works contract has been restricted to any work undertaken for an “Immovable property” whereas in case of VAT & Service Tax provisions works contracts for movable properties were also considered as work contracts.
As per para 6(a) of schedule II of CGST Act, 2017
Works Contracts = Supply of Services
ITC on Works Contracts
As per section 17(5)(c) of the CGST Act,2017, Input tax credit shall not be available in respect of the works contract services when supplied for construction of immovable property (other than Plant & machinery) except where it is an input service for further supply of works contract service.
Thus ITC in case of works contracts can only be availed by one who is in the same line of business & using such services received for further supply of works contracts services.
For example: A company has granted a contract of construction of building to a contractor, the main contractor has engaged a sub contractor for a certain portion of services. The sub contractor has raised a tax invoice to main contractor.
Then the main contractor will be entitled to ITC on invoice raised against him by his sub contractor whereas the company which allotted the contract will not be entitled to avail ITC on invoice raised by the main contractor.
ITC in case of Plant & Machinery
Plant and Machinery in certain cases when affixed permanently to the earth would constitute immovable property. When a works contract is for the construction of plant and machinery, the ITC of the tax paid to the works contractor would be available to the recipient, whatever is the business of the recipient. This is because works contract in respect of plant and machinery comes within the exclusion clause of the negative list and ITC would be available when used in the course or furtherance of business.
Valuation of Works Contracts
Valuation of works contract in case of supply of service is amount charged for such service, in case of works contract involving transfer of property in land or undivided share of land as the case may be, then the
value of supply of service and goods portion in such supply = Total amount charged for such supply (less) value of land or undivided share of land as the case may be( value of land/undivided share of land is deemed to be the one third of the total amount charged for such supply).
Note: Total amount means a sum of
- Consideration charged for aforesaid service and
- Amount charged for transfer of land or undivided share of land as the case may be
Author Bio
Special Class Contractors are providing road construction works to the Roads and Buildings Department of the State Government of Andhra Pradesh. They are main contractors and not sub-contractors. They availed and utilised Input Tax Credit. In terms of Sections 17(5)(c) and 17(5)(d) of the CGST Act, 2017, the contractors are not eligible for ITC. State Government Department is settling the bill to the contractors after reducing ITC as if the contractors are eligible for ITC. It is time the GST Council clarified the position.