Works contract under GST – Analysis and Tax Rates

Definition of works contract under GST-

Section 2(119) CGST ACT 2017- defines works contract as contract for-

-Building

-Construction

-Fabrication

-Completion

-Erection

-Installation

-Fitting out

-Improvement

-Modification

-Maintenance

-Renovation

 -Alteration

–Commissioning

Of any Immovable Property –wherein transfer of property in goods –whether as goods or in some other form is involved in execution of such contract.

Analysis–

The expression works contract is limited to contracts to do with Immovable property-nothing to do with movable property. It means contract is works contract only when resultant is immovable property.

√ 14 services are included in definition of works contract.

√ There must be transfer of property in goods or in such other form.

√ Transactions resulting in movable property would be treated as composite supply of goods or services depending on principal supply.

√ Definition of composite supply- The following composite supply shall be treated as a supply of services-

• Works contract as defined in Section 2(119)

It means Works Contract = Composite Supply

Only difference is that Works contract deals with immovable property and composite supply deals with movable property.

Definition of Immovable Property-

♦  Shall include land

♦  Benefits to arise out of land

♦  Things attached to earth or

♦  Permanently fastened to anything attached to earth

Nature /classification of works contract-

As already discussed above that works contract is one form of composite supply and as per Schedule II of CGST ACT always treated as supply of services.

Further, Schedule III- Activities/transactions which shall be treated as neither as a supply of goods nor supply of services

Para 5- Sale of Land and subject to clause (b) of paragraph 5 of Schedule II, sale of building – It means sale of land and sale of building outside GST if sale is done after obtaining completion certificate.

SAC Codes useful for Works Contract:-

SAC Codes useful for Works Contract-9954

Time of Supply in case of Works Contract:- 

Works Contract is continuous supply of services .There can be three cases-

♦ If Due date of payment is ascertainable from contract-

-Invoice shall be issued on or before due date of payment.

♦ If Due date of payment is not ascertainable from contract-

-Invoice shall be issued on or before date of receipt of payment.

♦ If Payment is linked to completion of event-

-Invoice shall be issued on or before the date of completion of event.

Place of Supply in case of Works Contract:- 

As per Section 12 of IGST Act –The place of supply of services directly in relation to immovable property shall be location at which immovable property is located.

But now question comes if there is works contract in 10 states – is there any need to get registered in all 10 states??

• No, there is no need to get register in each state.

ITC in case of works contract:-

Blocked Credit under GST –

Sec 17(5) – (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;

Point to be Note:-

The term “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

Further 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.

Example- XYZ is a works –contractor constructing immovable property for ABC and also hires sub-contractor PQR for completing his work. In this case ABC cannot claim ITC on Invoice raised by XYZ but XYZ can claim ITC on work done by sub-contractor.

Sec 17(5) (d) – Goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Example- Mehta Industries constructs office building for headquarters, ITC will not be available.

Rate of GST in case of Works Contract-

1. General Rate of tax – 18%
2. Specific supplies to Government – 12 %
3. Specified supplies for general public – (like railways and roads etc) – 12%
4. Earth work more than 75 % to Government – 5%