GST INTRICACIES IN WORKS CONTRACT INCLUDING LATEST

GST INTRICACIES IN WORKS CONTRACT INCLUDING LATEST DEVELOPMENTS

28th January 2022

GST INTRICACIES IN WORKS CONTRACT INCLUDING LATEST DEVELOPMENTS

GST INTRICACIES IN WORKS CONTRACT INCLUDING LATEST DEVELOPMENTS

Author

CA. Shiva Goyal (FCA)

cashivagoyal@gmail.com

Position under GST

Under GST laws, the definition of “Works Contract” has been restricted to any work undertaken for an “Immovable Property” unlike the existing VAT and Service Tax provisions where works contracts for movable properties were also considered.

The 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.”

Thus, from the above it can be seen that the term works contract has been restricted to contract for building construction, fabrication etc. of any immovable property only. Any such composite supply undertaken on goods say for example a fabrication or paint job done in automotive body shop will not fall within the definition of term works contract per se under GST. Such contracts would continue to remain composite supplies, but will not be treated as a Works Contract for the purposes of GST.

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 demarcation of a works contract as a supply of service under GST.

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 an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service.

Thus, ITC for works contract can be availed only by one who is in the same line of business and is using such services received for

further supply of works contract service. For example, a building developer may engage services of a sub-contractor for certain portion of the whole work. The sub-contractor will charge GST in the tax invoice raised on the main contractor. The main contractor will be entitled to take ITC on the tax invoice raised by his subcontractor as his output is works contract service. However, if the main contractor provides works contract service (other than for plant and machinery) 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.

Construction on Own Account [Not a works Contract]

Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer before issuance of completion certificate, will be considered as a supply of service. [Point no 5(b) of Schedule II]

However, It will be treated as a supply of goods if the entire sales consideration is received after issuance of completion certificate by the competent authority or after its first occupation, whichever is earlier.

Example:

DLF builds a cyber-city in Delhi. These complexes are sold to individual buyers before the issue of completion certificates. This sale transaction will be considered as a supply of service.

Works Contract for Movable Property

GST law has defined work contract for immovable property only.

Just like immovable property, work contract for a movable property is also a composite supply.

However, it is not a supply of service.

Example:

Mr. Mishra contracted a carpenter to make a chair, Table and a whole set of movable furniture. In this case, the carpenter will supply goods like wood, nail, and color and labor services too.

The final product will be movable property. Therefore, it will be considered as a composite supply rather than a works contract.

Difference between works contract and composite supply

Ground for Difference	Works Contract	Composite Supply
Nature of Supply	Supply of Service	Depends on the principal supply. In the above example, the carpenter’s principal supply is his service. Therefore, the whole transaction will be considered as service.
GST Rates	Specific GST rates are prescribed	GST rate will depend on principle supply. GST rate of principle supply apply to whole transaction value.
Input Tax Credit (ITC) to the recipient of Supply	Not available (Apart from specific Situation discussed later)	Available

Maintenance of records

As per Rule 56 (14) of the CGST Rules, 2017, every registered person executing works contract shall keep 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

The rate of GST for Works Contract service has been prescribed in

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

Thus, rates are tabulated below: –

S.No.

Activity

Rate

1.

Construction of a

ü complex,

ü building,

ü civil structure

ü or a part thereof,

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.

9% CGST

Plus

9% SGST

or

18% IGST

2.

Composite supply of works contract as defined in

clause 119 of section 2 of Central Goods and Services

Tax Act, 2017

9% CGST

Plus

9% SGST

or

18% IGST

3.

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

Ø construction,

Ø erection,

Ø commissioning,

Ø installation,

Ø completion,

Ø fitting out,

Ø repair, maintenance,

Ø renovation,

Ø 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

9% CGST

Plus

9% SGST

or

18% IGST

4.

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

Plus

6% SGST

or

12% IGST

5.

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 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 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

Plus

6% SGST

or

12% IGST

6.

Construction services other than

above

9% CGST

Plus

9% SGST

or

18% IGST

AMENDMENTS

Changes in works contract services to Government made applicable from 01.01.2022 vide Notification No. 15 & 16/2021-CT (Rate) dt. 18.11.2021

AMENDMENT TO NOTIFICATION NO.11/2017- CENTRAL TAX (RATE) DATED THE 28TH JUNE, 2017

(1)

(2)

(3)

(4)

(5)

3

Heading 9954

(Construction services)

(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 Central Government, State Government, Union territory, a local authority, a Governmental Authority or a Government Entity 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

Provided that where the services are supplied to a Government Entity, they should have been procured by the said entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local authority, as the case may be;

(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 AwaasYojana;

(c) a civil structure or any other original works pertaining to the “ln-situ redevelopment of existing slums using land as a resource, under the Housing for All (Urban) Mission/ Pradhan Mantri Awas Yojana (Urban);

(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 MantriAwasYojana;

(da) a civil structure or any other original works pertaining to the “Economically Weaker Section (EWS) houses” constructed under the Affordable Housing in partnership by State or Union territory or local authority or urban development authority under the Housing for All (Urban) Mission/ Pradhan Mantri Awas Yojana (Urban);

(db) a civil structure or any other original works pertaining to the “houses constructed or acquired under the Credit Linked Subsidy Scheme for Economically Weaker Section (EWS)/ Lower Income Group (LIG)/ Middle Income Group-1 (MlG-1)/ Middle Income Group-2 (MlG-2)” under the Housing for All (Urban) Mission/ Pradhan Mantri Awas Yojana (Urban);

(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

(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, including 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 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;

(da) low-cost houses up to a carpet area of 60 square metres per house in an affordable housing project which has been given infrastructure status vide notification of Government of India, in Ministry of Finance, Department of Economic Affairs vide F. No. 13/6/2009- INF, dated the 30th March,2017;

(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) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act,

6

Provided that where the services

2017, provided to the Central Government, State Government, Union Territory, a local authority, a Governmental Authority or a Government Entity 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.

are supplied to a Government Entity, they should have been procured by the said entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local authority, as the case may be

(vii) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, involving predominantly earth work (that is, constituting more than 75 per cent. of the value of the works contract) provided to the Central Government, State Government, Union territory, local authority, a Governmental Authority or a Government Entity.

2.5

Provided that where the services are supplied to a Government Entity, they should have been procured by the said entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local

				authority, as the case may be
		(ix) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017 provided by a sub-contractor to the main contractor providing services specified in item (iii) or item (vi) above to the Central Government, State Government, Union territory, a local authority, a Governmental Authority or a Government Entity.	6	Provided that where the services are supplied to a Government Entity, they should have been procured by the said entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local authority, as the case may be.
		(x) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017 provided by a sub-contractor to the main contractor providing services specified in item (vii) above to the Central Government, State Government, Union territory, a local authority, a Governmental Authority or a Government Entity.	2.5	Provided that where the services are supplied to a Government Entity, they should have been procured by the said entity in relation to a work entrusted to it by the Central

Government, State Government, Union territory or local authority, as the case may be.

Explanation – For the purposes of this notification, –

“Governmental Authority” means an authority or a board or any other body, – (i) set up by an Act of Parliament or a State Legislature; or (ii) established by any Government, with 90per cent. or more participation by way of equity or control, to carry out any function entrusted to a Municipality under article 243 W of the Constitution or to a Panchayat under article 243 G of the

“Government Entity” means an authority or a board or any other body including a society, trust, corporation, i) set up by an Act of Parliament or State Legislature; or ii) established by any Government, with 90per cent. or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.

AMENDMENT TO NOTIFICATION NO.12/2017- CENTRAL TAX (RATE), DATED THE 28TH JUNE, 2017

(1)	(2)	(3)	(4)	(5)
3	Chapter 99	Pure services (excluding works contract service or other composite supplies involving supply of any goods) provided to the Central Government, State Government or Union territory or local authority or a Governmental authority or a Government Entity by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution.	Nil	—
3A	Chapter 99	Composite supply of goods and services in which the value of supply of goods constitutes not more than 25 per cent. of the value of the said composite supply provided to the Central Government, State Government or Union territory or local authority or a Governmental authority or a Government Entity by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution.	Nil	—

Valuation of Work Contracts

Valuation of a works contract service is dependent upon whether the contract includes transfer of property in land as a part of the works contract.

In case of supply of service, involving transfer of property in land or undivided share of land, as the case may be, the value of supply of service and goods portion in such supply shall beequivalent to the total amount charged for such supply less the value of land or undivided share of land, as the case may be, and the value of land or undivided share of land, as the case may be, in such supply shall be deemed to be one third of the total amount charged for such supply.

Explanation. – For the above purpose, “total amount” means

the sum total of, –

(a) consideration charged for aforesaid service; and

(b) amount charged for transfer of land or undivided share of

land, as the case may be.

Place of Supply in respect of Works Contract

Works Contract under GST would necessarily involve immovable property. In view of the same the place of supply would be governed by Section 12(3) of the IGST Act, 2017, where both the supplier and recipient are located in India. The place of supply would be where the immovable property is located.

In case the immovable property is located outside India, and the supplier as well as recipient both are located in India, the place of supply would be the location of recipient as per proviso to Section 12(3) of the IGST Act, 2017.

As per Section 13(4) of the IGST Act, 2017, in cases where either the Supplier or the Recipient are located outside India, the place of supply shall be the place where the immovable property is located or intended to be located.

Works Contract- Input Tax Credit (ITC)

Chapter V of CGST Rules, 2017 talks about Input Tax credit mechanism. One of the biggest advantages expected from the implementation of GST Act is that it would remove cascading effect by facilitating seamless flow of credit. GST Act aims at removing the restrictions placed in the present Cenvat credit rules on availment of credit which lead to break in the credit chain and consequent cascading effect which further leads to increase in cost of goods and services. Under GST, seamless tax credit flow has been ensured by providing for the availment of ITC to the purchasing dealer in respect of the GST paid by the supplying dealer.

ITC has been defined as credit of IGST/CGST/SGST charged on any supply of goods and or a service used or intended to be used in the course or furtherance of business and includes the tax payable under reverse charge. Registered taxable person shall be eligible to avail ITC credited to the e-credit ledger subject to condition prescribed without restrictions of availment.

Section 17 (5) (c) of CGST Act 2017:

Input Tax Credit shall not be available in respect of the following,

“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”

However, The restriction does not apply to plant and machinery and also in case the input services are further used for supply of Works Contract service under GST (Contractor can avail the ITC in respect of services availed from the sub-contractor).

FAQ’s (Frequently asked Questions)

What is the procedure for invoicing in case of services provided to Government Organizations?

There is no separate procedure for invoicing in case of services provided to Government Organizations, invoice needs to be issued in accordance with section 31 of CGST Act, 2017 only.

What is the time of supply in this nature of services?

Time of supply of services is earliest of:

Date of issue of invoice.
Date of receipt of advance/ payment.
Date of provision of services (if invoice is not issued within 30 days of service)

Example:

Mr. X provides services worth Rs 10000 to Mr. Y on 1st January. The invoice was issued on 20th January and the payment for the same was received on 1st February.

In the present case, we need to 1st check if the invoice was issued within the prescribed time. The prescribed time is 30 days from the date of supply i.e. 31st January. The invoice was issued on 20th January. This means that the invoice was issued within a prescribed time limit.

The time of supply will be earliest of –

Date of issue of invoice = 20th January
Date of payment = 1st February

This means that the time of supply of services will be 20th January. In case the invoice is issued after 31st January then time of supply will be 1st January.

What is the place of supply in this nature of services?

Generally, the place of supply of services is the location of the service recipient.

If such service is provided directly in relation to an immovable property i.e., any services provided by architect, engineer etc. then place of supply will be the place where the immovable property is located or intended to be located.

What is the concept of TDS under GST and what are the important things that we should know about TDS like how to claim, till when we can claim it as a credit etc.?

Tax Deducted at Source (TDS) is one of the ways to collect tax based on certain percentages on the amount payable by the receiver on goods/services. The collected tax is a revenue for the government.

Who can deduct TDS under GST as per section 51 of CGST Act, 2017? (Care must be taken in case of supplies made to undermentioned entities)

A department or
an establishment of the Central Government or State Government; or Local authority; or
Governmental agencies; or
Such persons or category of persons as may be notified by the Government.

As per the Notification dated 13th September 2018, the following entities also need to deduct TDS-

An authority or a board or any other body which has been set up by Parliament or a State Legislature or by a government, with 51% equity (control) owned by the government.
A society established by the Central or any State Government or a Local Authority and the society is registered under the Societies Registration Act, 1860.
Public sector undertakings.

Rate of TDS under GST

TDS is to be deducted at the rate of 2 percent (i.e. 1% CGST/ SGST each or 2% IGST) on payments made to the supplier of taxable goods and/or services, where the total value of such supply, under an individual contract, exceeds two lakh fifty thousand rupees. As stated above, there will an automatic reflection in the electronic ledger of the deductee (supplier) once the deductor files his/her returns. The deductee can claim credit in his electronic cash ledger of this tax deducted and use it for payments of other taxes.

One can claim the TDS credit by accepting the credit reflected in the TDS credit received tab from User services in GSTIN portal.

What is the SAC (Service Accounting Code) Code for Work Contract under GST?

SAC Code is a numeric code (like HSN Code for classifying Goods) and is used to classify different services under GST regime. It has to be mentioned necessarily in the GST Invoices and GST Returns.

First of all it must be clarified that, According to GST Council HSN code is applicable only to products while Work Contracts fall under the ambit of ‘Services’ and the code for services is known as SAC (Service Accounting Code) which is a six digit number.

And, since the GST rate for works contract is 18%, thus the SAC code for Work Contracts is 9954.

However, the GST rate for works contract related to construction or building of a unit intended for the purpose of sale is 12%.

SAC 9954 (work contracts) deals with construction services and there are various sub-classifications under this heading and when that particular code (from sub-classified terms) is added to it, this becomes six-digit SAC Code.

Note:

The views expressed are the personal views of the author only. Therefore, the same should not be considered as final opinion on the subject matter. There may be other views also. So, the readers are advised to consider all the points before relying upon the above write ups. The write up is only for academic purposes and not for professional use.

28th January 2022

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