In simple words, a work contract is basically an agreement of service which may likewise include the supply of products in the execution of the agreement. It is mainly a combined supply of goods and services, where in the agreement between parties, service factor plays the key role.
Generally, a work contract is associated with both immovable and movable properties. For example, if a sub-contractor accepts a sub-contract of the work of the building, it will be a contract of work in regards to immovable property. In the same manner, if a compound supply in reference with the movable property like fabrication/painting/annual maintenance contracts etc. is approached, then the same would come surprisingly close to the expansive meaning of a works contract. How will GST impact on works contract? Let’s understand here.
Position of Works Contract in GST
Under the GST laws, the meaning of “work contract” has been contracted to any work attempted in any ‘Immovable property” unlike the existing VAT and Service Tax provisions where works contracts for movable properties were also considered.
The Contract of Work 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.”
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So, from the above detail, it can be understood that the term work contract in respect of GST has been restricted to the contracts given for the buildings, fabrication, etc. of any immovable property. And the fabrication or paint job done in automotive body shop will not fall in the work contract category as per the GST rule. This type of contracts will continue to remain the combined supply undertaken on goods, but these will not be treated as the work 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 separation of the works contract as a supply of service under GST.
And as per, section 17(5) (c) of the CGST Act, 2017, input charge credit might not be accessible in regard of the works contract administrations when provided for development of an ardent property (other than plant and apparatus) with the exception of where it is an information benefit for additional supply of works contract service.
Therefore, the input tax credit for the work contracts can only be utilized by the person who is in the same line of business and is using such administrations got for an additional supply of works contract benefit. For example, if a building contractor may engage services of a sub-contractor for the certain portion of the whole work, then the sub-contractor will charge GST in the tax invoice raised to the main contractor. The main contractor will be entitled to take ITC on the tax invoice raised by his sub-contractor as his output is works contract service. However if the main contractor provides works contract service (other than for plant and tools) to a company say in the IT business, the ITC of GST paid on the invoice raised by the works contractor will not be available to the IT Company.
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.
Maintenance of Records for Work Contract Services
As per Rule 56 (14) of the CGST Rules, 2017, every registered person executing the works contract should keep the 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 received for the execution of works contract; (c) description, value and quantity (wherever applicable) of goods or services utilized in the execution of works contract; (d) the details of payment received in respect of each works contract; and (e) the names and addresses of suppliers from whom he received goods or services.
Rate of GST on Work Contracts
The rate of GST for Works Contract service has been prescribed in serial number 3 of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 as amended by Notification No. 20/2017-Central Tax (Rate) dated 22.08.2017 & notification no.24/2017-Central Tax (Rate) dated 21.09.2017 and is as under:
|(i) Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier. (Provisions of paragraph 2 of this notification shall apply for valuation of this service)||9% CGST + 9% SGST|
|(ii) composite supply of works contract as defined in clause 119 of section 2 of Central Goods and Services Tax Act, 2017||9% CGST + 9% SGST
|(iii) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied to the Government, a local authority or a Governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of, –
(a) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);
(b) canal, dam or other irrigation works;
(c) pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal
|6% CGST + 6% SGST|
|(iv) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,
(a) a road, bridge, tunnel, or terminal for road transportation for use by general public;
(b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana;
(c) a civil structure or any other original works pertaining to the “In-situ rehabilitation of existing slum dwellers using land as a resource through private participation” under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana, only for existing slum dwellers;
(d) a civil structure or any other original works pertaining to the “Beneficiary led individual house construction / enhancement” under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana;
(e) a pollution control or effluent treatment plant, except located as a part of a factory; or
(f) a structure meant for funeral, burial or cremation of deceased
|6% CGST + 6% SGST|
|(v) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied by way of construction, erection, commissioning, or installation of original works pertaining to,-
(a) railways, excluding monorail and metro;
(b) a single residential unit otherwise than as a part of a residential complex;
(c) low-cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and
|6% CGST + 6% SGST
|Urban Poverty Alleviation, Government of India;
(d) low cost houses up to a carpet area of 60 square metres per house in a housing project approved by the competent authority under-
(1) the “Affordable Housing in Partnership” component of the Housing for All (Urban) Mission/ Pradhan Mantri Awas Yojana; (2) any housing scheme of a State Government;
(e) post-harvest storage infrastructure for agricultural produce including a cold storage for such purposes; or
(f) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages
|(vi) Services provided to the Central Government, State Government, Union Territory, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of – (a) a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession; (b) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or(iii) an art or cultural establishment; or (c) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in paragraph 3 of the Schedule III of the Central Goods and Services Tax Act, 2017.||6% CGST + 6% SGST|
|(vii) Construction services other than (i), (ii), (iii), (iv), (v) & (vi) above||9% CGST + 9% SGST|
Valuation of the Works Contract Under GST
Valuation of the work contract assistance is dependent upon whether the contract includes the transfer of property as the part of work contract. If there should arise an occurrence of supply of administration that involves the transfer of property in land or the undivided share of land, the estimation of supply of administration and products parcel in such supply should be comparable to the aggregate sum charged for such supply less the credit of land or unified offer of land, all things considered, and the evaluation of land or unified offer of land, by and large, in such supply might be esteemed to be 33% of the aggregate sum charged for such supply.
For the above purpose, “total amount” means the sum total of,-
(a) consideration charged for aforesaid service and
(b) the amount charged for transfer of land or undivided share of land
Place of Supply in Regards of Work Contract
Under GST, the work contract will compulsorily involve the immovable property. The IGST Act in Section 12(3) would govern the same place of supply, where both the supplier and the recipient is located in India. The immovable property would be located at the place of supply.
If the immovable property is located out of india, and the supplier and recipient are located in india, then the place of supply would be the location of recipient as per rule under Section 12(3) of the IGST Act, 2017.
Whereas, according to the Section 13(4) of the IGST Act, 2017, if either the supplier or recipient is located out of india, then the place where supply will happen shall be the place where the immovable property is located or supposed to be located.
Under the past aberrant charges allotment, there were issues in impose treatment of works contract. Both the Central Government (on the administrations part of a works contract) and the State Governments (on the offer of merchandise partition associated with the execution of a works contract) used to demand impose. Therefore, the similar contract was liable to tax assessment by both Central and State Government.
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GST Council has only one aim, that to put on rest the controversies going round about what will comprise the work contract (applicable on the immovable properties only), by stating that the works contract will constitute a supply of service and specifying the uniform rate of tax applicable on the same value across the India. Hence, there is positive impact of GST on works contract services.