What is works contract?
Works contract, by definition, is an agreement to carry out for cash, deferred payment, or other valuable consideration – building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property. Typically, it is a combination of goods and services but is neither a composite nor a mixed supply as defined under the CGST Act. It also includes transfer of property (whether as goods or in some other form), which has happened for the purpose of execution of a works contract.
It goes without saying that works contract in general, is of prime importance in the field of real estate. Thus, it is crucial for all real estate players to understand the treatment of works contract under GST, so that they can equip themselves for the change.
Works contract in the previous regime
In the previous regime, works contract was treated as a combination of goods and services. This meant that VAT was applicable on the goods component, and Service Tax on the service component. If in the course of work contract, a new product would be manufactured, and excise would also be applicable. The situation was complicated, as different states had different VAT rates, as well as different composition schemes for different VAT rates.
To add to the complication, the abatement of Service Tax on new works contract was 60%, whereas the same for repair contracts was 30%. It also required a great deal of documentation, as under VAT specific records, such as, purchases, sales, stocks, VAT account, works contract account, and so on. These records needed to be maintained and retained for at least a period of 5 years from the end of the financial year in which they were effected.
Works Contract under GST
GST has made life simpler for any business dealing in works contracts. To begin with, in the true spirit of the mantra “One Nation One Tax”, the confusion over treatment of works contract as part goods, part services has been removed. It has been decided to consider works contract purely as a service at 18% GST rate. This treatment of works contract under GST as a service, and not as supply of goods will bring in a much-needed clarity for all the stakeholders involved.
To remove any confusion about what exactly may be considered as works contract, the GST Council has included the following points under the supply of services, as per Schedule 2:
- All the works related to 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.
- Transfer of property in goods (whether as goods or in some other form) involved in the completion of a works contract.
It is to be noted, that works contract under GST will be applicable only for immovable properties.
Impact of GST on Works Contract
Let us now discuss the various implications of works contract under GST.
Separate works contract accounts
A registered taxable person executing a works contract should keep separate accounts for works contract under GST showing:
- Names and addresses of persons on whose behalf the works contract is executed.
- Description, value and quantity (wherever applicable) of goods or services received for execution of works contract.
- Description, value and quantity (wherever applicable) of goods or services utilized in execution of works contract.
- Details of payment received in respect of each works contract.
- Names and addresses of suppliers from whom he has received goods or service.
Decentralised service registration
As per the GST law, every supplier shall be liable to register, provided his aggregate turnover crosses the threshold limit of INR 20 lakh (INR 10 lakh in Special Category States). The same rule will be applicable for a works contract service provider as well.
However, the catch is, that services in the previous regime had a centralized registration, whereas under GST, the registration is decentralised. The fact that a works contractor will now need to obtain registration in all the states where he has a project office could be a potential irritant.
No composition scheme
The construction sector in particular, over the years, has got habituated to pay taxes under simplified composition schemes on the total project value, without any Input Tax Credit. Due to the unorganized nature of this sector, there has always been, and always will be, a class of contractors, who may not be able to maintain records as per the prescribed norms.
But unfortunately, the composition scheme for services under GST is restricted only for those persons supplying restaurant services. This means that any works contracts service provider will need to register as a normal supplier on crossing the threshold. This will be a big blow to the small sub-contractors who cannot opt for the composition scheme, and thus will be facing an increase in compliance and associated costs.
Time of supply – as per services
Time of Supply for the purpose of determining a regular works contract under GST would be the earliest of the following dates –
- Date of issue of invoice: If the invoice is issued within 30 days from the date of completion of the service.
- Date of completion of service: If the invoice is not issued within 30 days from the date of completion of the service.
- Date of receipt of payment: Earliest of Date of payment entered in books of account OR Date on which payment is credited to the bank account.
If the supplier receives an amount up to INR 1000 in excess of the invoice amount, the time of supply for the extra amount shall be the date of issue of invoice. This is at the option of the supplier.
However, especially in the case of works contract under GST, one may need to ascertain time of supply in case of continuous services. As per the GST law, continuous supply of services is defined as a supply of services which is provided, or agreed to be provided, continuously or on recurrent basis, under a contract, for a period exceeding three months with periodic payment obligations and includes supply of such service as the Central or a State Government may, whether or not subject to any condition, by notification.
In such a case, time of supply will be determined as follows:
|Where the due date of payment is ascertainable from the contract||The date on which the payment is liable to be made by the recipient of service, whether or not any invoice is issued or any payment has been received by the supplier of service.|
|Where the due date of payment is not ascertainable from the contract||Each such time when the supplier of service receives the payment, or issues an invoice, whichever is earlier.|
|Where payment is linked to the completion of an event||The time of completion of that event.|
Place of supply – as per services
In works contract under GST, location of the immovable property will be considered as the place of supply. Like any other service under GST, providing works contract services in a different state, will require separate registration to be taken at that state. Thus, irrespective of whether a works contractor is located in the same state as that of the immovable property or in a different one, the tax applicable will always be CGST + SGST / UTGST.
Under the GST Regime, input tax credit is not available for:
- All the works contract services when supplied for construction of immovable property (excluding plant and machinery), except where it is an input service for the further supply of works contract service – which means that contractor can avail the ITC in respect of services availed from the sub-contractor.
- All goods or services accepted by a taxable person for constructing immovable property with his own account. This excludes plant and machinery, even when used for use in the course or furtherance of business.
No abatement has been prescribed as far as GST on works contract services is concerned. The previous regime had an abatement of 60% for new works contract and 30% on repair works, as mentioned earlier. Given that the rate for service tax was 15%, and the GST rate for works contract is 18%, it is bound to create an extra burden of taxation in the GST era.
Long term construction / Works contracts
In the case of constructions or contracts going on for a long period, there are bound to be circumstances wherein the contract began in the previous regime and has extended into the GST regime. The GST law provides that goods and/or services supplied on or after 1st of July – i.e. the launch date of GST, in pursuance of a contract entered into prior to 1st of July, shall be taxed as per GST norms. However, it also stipulates that in case the full duty or tax payable for such supplies has already been paid under the earlier law, then no tax shall be payable under GST. This is, even if part consideration for the supply is made on or after 1st July.
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