Work Contract under GST – Definition, ITC, TDS, Applicability
Work Contract under GST: Works contract has always remained a mystery for over half a century and has acted as a rodent to all the avid indirect tax lovers. Background of Works Contract Under GST. Definition of Works Contract, Input Tax credit, TDS provisions under CGST Act, Applicability.
Works contract is essentially a contract of service which may also involve supply of goods in the execution of the contract. It is basically a composite supply of both services and goods, with the service element being dominant in the contract between parties.
It is basically a composite supply of transfer of property (goods) and provision of labour (service). Before implementation of GST, works contract was liable for both vat in form of works contract tax and service tax but an attempt has been made to simplify the term “WORKS CONTRACT” so as to reduce the litigations that used to occur before.
“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.
Work Contract under GST
Supply of Services
For GST law, works contract as defined above will be treated as a supply of service, thereby putting a closure to the deliberation on the methodology of segregating the works contract between goods and services.
Input Tax Credit
Input tax credit shall not be available in respect of the works contract services when supplied for construction of immovable property,(other than plant and machinery), except where it is an input service for further supply of works contract service.
ie credit of GST paid on works contract services will be allowed only if the output is also works contract services.
TDS Provisions under CGST Act
- Applicable to suppliers notified by the Central Government on recommendations of council.
- One standard rate viz. 1%
- (a) A department or establishment of the Central or State Government, or
- (b) Local authority, or
- (c) Governmental agencies, or
- (d) Such persons or category of persons as may be notified, by the Central or a State Government on the recommendations of the Council.
- One single certificate of deduction –cum-remittance to be furnished by the Deductor within five days of remittance.
- Under VAT Law If certificate of deduction alone is furnished by the Deductor, burden on the works contractor to prove deduction of tax at source. No such burden cast on the Deductee. More onus is on the Deductor.
- Refund provisions clear. Credit can also be claimed from the amount reflected in the Electronic Cash Ledger.
Person eligible for input tax credit
- Person providing works contract service and availing abatement under notification no.26/2012 shall be entitled to take credit of eligible duties and taxes on inputs held in stock and inputs contained in semi finished goods or finished goods held in stock on the date on which this provision is made effective.
Even if the construction contract or works contract is entered into prior to the date of introduction of GST, the contracts would be taxable under the GST Act.
Credit of VAT/Service Tax
Where tax was paid under both Value Added Tax Act and under Finance Act, 1994, viz., Construction service, works contract or supply of food/beverages, Tax shall be leviable under CGST Act on the supplies effected after the appointed day and the Value Added Tax or Service Tax shall be admitted as credit to the taxable person.
Eg: Contract entered in March, 2017 for Rs. 2,00,00,000/-. Advance received till 30th June, 2017 amounts to Rs. 10,00,000/-. Value Added Tax of Rs. 80,000/- and Service Tax of Rs. 1,20,000/-have been paid on the said advance. Assuming appointed day as 1st July, 2017 GST shall be levied on Rs. 2,00,00,000/- as per Sec 13 of the CGST Act. The value added tax and service tax paid shall be allowed as credit under the existing law in the manner as may be prescribed.
FAQ’s on Work Contract under GST
We all have numerous numbers of doubts in our mind and will see for each and every doubt the relevant answer.
Q. what exactly is works contract and where it has been defined?
Ans. Works contract has been defined in clause 119 of section 2 of cgst act 2017 which says that works contract is a contract for building, construction, fabrication, completion, erection, installation, improvement, repair, maintenance, and renovation etc. of any immovable property where transfer of property in goods is involved in execution of contract.
So, the conclusion drawn from the definition is that any work should be on immovable property and transfer in goods must take place.
We arrive at one more internal question which is what if such work has been done on movable property.
Answer to such question is it will be treated as a composite supply of goods or services depending upon the principal supply.
Q. What is the taxable event in GST and will works contract be goods or services?
Ans. We all know that many taxes were subsumed to form GST. Earlier we used to charge VAT on sale of goods, service tax on provision of service and excise duty on manufacture of goods, but in GST tax is liveable in the event “SUPPLY”. The word supply is very comprehensive and is very wide. It has been defined in section 7 of cgst act 2017 along with 3 schedules.
Works contract duly qualifies the definition of supply and will be liable to GST.
For GST, works contract will be treated as supply of service, thereby putting a closure to the deliberation on the methodology of segregating the works contract between goods and services.
Entry no 6(a) of schedule II clearly states that works contract will be treated as supply of service.
Q. Will construction of building, complex intended for sale to buyer be liable to GST?
Ans. Construction of a complex, building, civil structure which is intended to be sold to a buyer will be liable to GST only if part of consideration has been received by the supplier before issuance of completion certificate or first occupancy whichever is earlier.
Q. Will TDS provisions be applicable or not?
Ans. Yes, TDS provisions which are provided in section 52 of cgst act 2017 will be applicable to works contract provided amount is more than 250000 and it is not inter-state supply.
Many people are confused as to whether TDS u/s 194C of Income tax act 1961 will continue or not. Income tax provisions will continue to be applicable & TDS will be deducted at a rate of 1%/2% as the case may be on the amount excluding GST.
Q. Is there any benefit arising from input tax credit?
Ans. As per section 17(5) of cgst act 2017 input tax credit shall not be allowed in case of works contract except in case of plant and machinery. ITC shall be allowed only if it is an input service for further supply of works contract service.
Construction on own account will also not qualify for input tax credit. So, accordingly tax paid on works contract services will form part of cost of such asset as it will be capitalised thus increasing the amount of depreciation.
But this provision is for service recipient, provider of service I.e. builder, contractor can avail input tax credit of tax paid on inputs like bricks, cement, paints etc.
Q. Is composition scheme applicable?
Ans. As per entry 6(a) of schedule II of, works contract have been specifically determined as supply of service while going through the provisions of section 10 of cgst act 2017 composition scheme excludes supply of service except restaurant services. So, in short composition scheme is not applicable for works contractor.
Q. what is the rate of tax applicable?
Ans. Rate of tax is 18% with no abatement.
Q. Is reverse charge applicable on works contract?
Ans. No, reverse charge is no longer applicable it will follow forward charge mechanism.
Author – CA SARATH R KRISHNAN
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