GST: Impact of New Taxation Structure on Works Contract

According to the previous provisions, a works contract is a combination of the transfer of goods and services. Under the GST regime, the service tax applies only to work contracts on the service part. As per the listings, the construction of the building, maintenance, and repair of plant and machinery, and installation, repair, and alteration of any movable or immovable property come under a works contract.

Previous Taxation System for Works Contract

According to the old law, a works contract is composed of three types of taxable activities, which include the supply of goods and also the supply of services. If a new product is manufactured under the work contract, then such a product is taxable.

Whereas, VAT or sales tax levied on the transfer of property in goods pertains to carrying out a work contract, while Service tax will be applicable only on the services portion involved in the execution.

Latest Update

• Authority of Advance Ruling of Karnataka has been ordered to 12 per cent GST applicable on services of work contract associated with the making of a police station undertaken by Karnataka Housing Board. Read more
• The GST AAR Telangana has issued the order under section 98(4) rule 104 of CGST/TGST for M/s. Satya Dev Bommireddy. Read more

Works Contract and Its Provisions under GST India

GST Schedule II clearly announced that the following points are considered under the supply of service:-

• It includes all the works related to the construction of a complex, civil structure, building or a part thereof, which also includes a complex or building tagged for sale to a buyer, wholly or partly.
• Secondly, the works contract included in the transfer of property in goods (whether as goods or in some other form) involved in the completion of a works contract.

But as under the GST Regime, “One Nation, One Tax” has taken the place of the confusion related to the tax practices. Which says that the works contract will be considered under services and taxes would be deducted accordingly (not as goods or part goods/part services).

Under the current taxation structure, the states have different VAT schemes and different composition schemes for different VAT rates. And this procedure of work contract as service and not as a supply of goods would bring confusion among users, which requires more clarification & answers to the work contracts. Also, according to the recent government announcement of the tax rates, it is known that service tax is very tedious with 60% abatement on new works contracts and 30% abatement on repair contracts.

Recommended: GST vs VAT: Simple Way to Describe the Differences

Determine Time of Supply for Works Contract:

For determining the works contract date earliest, section 13(2) includes the time of supply points to be considered, which are:

• The date on which the invoice is issued by the supplier or the final date on which it is required to be issued. Generally, it is within 30 days from the completion of the works contract
• The receipt containing the date of payment or the date on which the payment is credited to the account by the supplier
• The date earlier from the  above is a considerable first
• If the invoice is not generated at the start, then the date of completion of the services is considered

Place of Provision: The Origination of Supply

The place of service determines which jurisdiction the particular works contract comes into. The place of provision(POP) is informed based on the supply of immovable property and other than immovable property.

1. Supply Of Services Of Immovable Property

According to section 9(4) of the IGST Act, the Place of a provision in the case of immovable properties is where it is situated regarding the services of:

• Architect
• Surveyors
• Engineers
• Estate agents
• Interior decorators
• Coordination services for the construction work

2. Supply Of Services Other Than Immovable Property

If the supply is made to a registered person, then the place of supply will be the location of the recipient of services

If the supply is made to an unregistered person, then the place of supply will be the location of the recipient or in other case location of the supplier.

No Availability of Input Tax Credit

The new GST Regime has declared that input tax credit is not available for:

• All the works contracts for the service supply for constructing an immovable property, excluding plant and machinery, except where it is an input service for the further supply of works contract service
• Goods or services accepted by a taxable person for constructing immovable property with his own account, excluding plant and machinery, even when used for use in the course or furtherance of business.

Looking at the example, if in case, a builder or contractor is not entitled to get ITC at the time of construction of the project but he can avail ITC for the input services at the time of supply under the works contract. This sentence creates confusion regarding the provision.

No description of Abatement

While the abatement is not under the laws of works contract, the current tax laws provide service tax at 15% and are divided into 2 categories i.e. 40% for the new work and 70% for the maintenance and repairing work.

The government has now revised the GST rates on works contracts to 12 per cent, however, this new rate is only for the work contractors. And other than this, the buyers will have to pay 12 per cent GST on the affordable housing plans along with the ITC claim. According to the calculations, the 18 per cent GST is only applicable on two-thirds of the total house value, which in turn makes the tax scenario 12 per cent on the overall cost of the house.

No Availability of Composition Scheme

Under the GST tax scheme, the composition scheme is not available for the work contractors as the nature of the business is serving, as the composition is available only for goods supply. This will affect the small sub-contractors and will subsequently increase their cost of compliance.

The GST rules & regulations still demand some clarification over the issues regarding input tax credit and the composition scheme. Various rules and regulations which are rolled out for the work contractors are not feasible and may increase the cost of compliance. All the points must be safeguarded to create a healthy environment for this particular area of industry.